There's growing concern in the mutual fund space about new regulatory requirements designed to increase transparency about business practices and generally expected to raise the stakes for fund firms and managers. In the rush to become compliant, up-to-date technology proves to be imperative in helping companies track performance and various types of risk, and ensuring that business operations are being run as efficiently as possible.
BNY Mellon offers fund managers just that. Jim Cecere, Head of Product for Global Financial Institutions, talks with Money Management Executive about how new regulations will impact the fund industry, and how BNY Mellon's product offerings help organizations address some of their bigger concerns in achieving compliance.
Proposals to change the regulatory landscape for investment managers and funds have been a hot topic for the past couple of years. Are those trends changing the conversations you are having with your clients?
Absolutely. While there is still a lot of uncertainty about the final impact of proposed regulations, there is no doubt that the industry has only begun to touch the tip of the regulation iceberg. The regulatory landscape and its potential impact on the funds industry is part of almost every client conversation. Requirements from the various regulators are putting pressure on our clients and the entire industry. The resources needed to comply from both a people and technology perspective are straining organizations and potentially requiring them to invest in upgrading their systems and hiring additional staff. Clients are looking for solutions on how to support the infrastructure needed while still being able to focus on their core competencies.
In a recent PWC PricewaterhouseCoopers (PwC) study, 83% of investment managers cited legal and regulatory issues as their greatest challenge. Those are the primary concerns that we are hearing from clients. The need for improved risk management and compliance reporting are two examples of where clients are looking for additional support.
How have operational departments within U.S. fund management businesses been impacted by crisis-related regulatory pressure, both domestically and internationally? How have asset service providers adapted to help clients with these issues?
Operations groups are spending more time and resources addressing issues like risk management, compliance and reporting. Fund managers are taking a hard look at their infrastructures and evaluating how they can address new regulatory requirements. One of the ways that they can gain improve efficiencies and manage costs is to outsource components or their entire investment operations so they can concentrate on their core competencies of gathering and managing assets. In a PwC survey, 40% of fund managers indicated that they plan to outsource at least one business process this year. We have seen increased interest by managers to outsource all or part of their middle and back office so that they can concentrate on front office activity. BNY Mellon has created OnCore, an integrated outsourcing business unit, to meet the increased demand for outsourcing services, which has been extremely well accepted in the market.
So new regulatory requirements have actually been good for asset service providers. Transparency, disclosure requirements and new regulatory reporting that impact traditional business models have allowed BNY Mellon to be a stronger partner.
Have institutional investors, such as pension plans or foundations and endowments, added more pressure to fund management operations (perhaps through asset changes, or through reporting requirements), and how have these investors affected both fund managers on the one hand, and service providers on the other?
Institutional investors are requiring greater transparency from their fund managers for management reporting and for regulatory reporting. This is where BNY Mellon has been able to provide value to our fund manager clients. As the market need for transparency and asset-level detail grows, BNY Mellon's approach to analytics and reporting has also expanded and become more sophisticated and innovative. A critical need and function of our Asset Servicing clients is to analyze and manage the various risks of their investments. These needs have grown with increasing alternative investment strategies, recent shocks to economies and markets, and new regulatory requirements. Clients must assess exposure, market, operational, regulatory and other risks. To respond to client demands and to seize the market opportunity enabled by our unique position as a global consolidator of investment information, we formed Global Risk Solutions to focus on expanding and delivering Asset Servicing risk solutions to our client base. We have a full menu of Performance and Risk Analytics products that provide performance and risk reports so managers can provide anything from basic performance to risk summaries by asset classes and global asset allocation to their underlying institutional clients. By putting these products under one umbrella, we can offer our clients a consolidated view of their risk profile.
We also offer regulatory administration to provide regulatory support services to fund clients. And because we recognize that our clients need access to information throughout the day, we deliver reporting and performance information through our on-line portal, Workbench, and through our Workbench Mobile application.
What are some of the other trends you are seeing on the regulatory front?
Regulations are no longer specific to one segment or one geographic location. Our clients are global organizations, and many of the proposals put forth in one geography impact their business in another region. In addition, regulators in all geographies are carefully watching the activity of other regulators. As a service provider, we take a holistic view as we develop new products.
Money Market stress testing is an example of a regulation that expanded beyond its original geography. After the fiscal crisis in 2008, money market funds became the focus of intense scrutiny from the Securities and Exchange Commission (SEC). In order to improve risk management, the SEC has required money market funds to perform stress testing that models the impact of interest-rate shocks, liquidity shocks and credit risk shocks to help identify when a fund might experience a depressed net asset value (NAV).
Using our existing performance & risk analytics capabilities, we partnered with Investor Analytics LLC to create a new Money Market Stress Test product that we offered to our fund clients. The European Securities and Market Authority (ESMA) later instituted a similar requirement for European money market funds, so we were able to offer our money market stress test product in Europe as well.
How are regulations impacting your products and services?
As clients are dealing with these changes ranging from Dodd-Frank to AIFMD from Money Market Reform to the Foreign Account Tax Compliance Act (FATCA), all clients are asking about how we are dealing with these regulations, and they are asking for products to support them in meeting their regulatory requirements.
There are a number of areas where we see additional opportunity to support fund managers. The first is to provide information for clients who want to manage reporting in-house. This information could range from that which is information needed for board presentations, management reporting, client meetings or regulatory reporting. The second is to offer new products like a Form PF reporting service, where BNY Mellon takes the information and provides reports to our clients to help them meet regulatory requirements.
What is the next emerging product trend that you see coming from regulatory changes?
The term "Big Data" is one that we are hearing a lot, but it really does capture a fund managers' need for harnessing information and delivering it to clients so that they can meet regulatory requirements, analyze data and customize reporting. How we take client and market data and combine that into usable information helps our clients find a solution to problems they face. As a service provider, we have a wealth of information, and being able to provide that information to clients adds value to the services that we provide.
Jim Cecere is Head of U.S. Global Product Management for BNY Mellon. He is responsible for the development of product solutions, as well as the long-term strategic plans of key segments within Asset Servicing, including funds, banks and insurance. Jim is also a sought after spokesperson at industry conferences and events.