Fund managers who think that only brokerage firms and banks should worry about the operational and technological changes being wrought by the Dodd-Frank financial reform legislation had better think twice.

Waiting for the Securities and Exchange Commission and other regulators to make up their minds on just how they will implement any high-level requirements for reducing market, credit and operational risk won't cut it, said panelists and attendees at a conference held by the operations trade group International Securities Association for Institutional Trade Communication in Boston last week.

"Fund managers need to engage with regulators on just how they want the final rules to come out and can't wait until the last minute to start preparing," said Tim Lind, global head of strategy and business development for enterprise content at Thomson Reuters.

Still to be decided: whether the SEC will tap the Financial Industry Regulatory Authority as the new auditor for investment advisor exams.

Other questions also unanswered: How many fund managers will have to centrally clear their so-called standardized-over-the counter derivative contracts when new swaps markets emerge; which contracts will be exempt; and who will have to report to the newly created Office of Financial Research, the watchdog for systemic risk.

Alternative investment funds registering with the SEC for the first time will also be concerned about just how much information the SEC will want them to disclose and when.

What is certain?

Fund managers won't have much time to prepare.

The SEC and other regulatory agencies such as the Commodity Futures Trading Commission will likely have to come up with answers by the end of this year at the latest and implement them in 2012.

At minimum, regardless of their categorization, fund managers will need to be able to measure their market, credit and liquidity risk on an enterprise-wide basis.

"It comes down to correct valuations, position and counterparty recordkeeping, transaction reporting and financial reporting for any type of regulatory audit," Lind said.

The common denominator to regulatory change: the ability to aggregate accurate data quickly from multiple business silos in the event of a regulatory audit.

"The fund manager must collect lots of data quickly from disparate applications and crunch the numbers to determine just how much risk the firm is taking with a particular counterparty or customer in a particular asset," said Dan Simpson, chief executive of Cadis, a London-based data management software firm. "The days of keeping data on spreadsheets will now be over because there won't be any way for fund managers to track down just where it is being held let alone do any calculations."

Moving from a bilateral model of clearing-a process which requires clearing each trade with each counterparty separately-to a centralized one through a central counterparty at a clearinghouse will require fund managers to aggregate their exposures to each counterparty, clearing agent and clearinghouse by asset class.

Such aggregation means that data on positions, risk metrics, confirmation and affirmation terms must be gathered from multiple internal applications; those include portfolio accounting, order management systems, securities master files; risk; trading and back office systems.

Among the most common mistakes that emerge: discrepancies in the records of fund managers and counterparties on the number and terms of the OTC contracts traded.

If unresolved, those differences will lead to disputes over just how much margin is required. Once able to resolve margin disputes in a matter of days, fund managers will need to do so on a daily basis if their OTC trades are cleared through a clearinghouse.

With such additional burdens also come benefits. "Fund managers will be able to optimize their use of collateral and establish better liquidity management procedures if they keep good information about their collateral requirements with each clearing broker," said Jean-Baptiste Gaudemet, head of product management for Misys Sophis, a front-to-back office risk management firm.

For fund managers concerned their operating systems may not be up to snuff, outsourcing is an option. There is no hard and fast rule for which type of middle and back office services a fund manager might or should outsource. But there are plenty of providers willing to help out.

"Each fund manager is reacting differently to the legislation and evaluating their inefficiences and where a third party provider can help out," said Peter Keaveney, managing director of the asset servicing unit of Bank of New York Mellon in New York.

Custodian banks such as BNY Mellon can handle anything from trade confirmation all the way to clearing and settlement. So far, the most popular outsourced services are valuation and reconciliation.

"Fund managers don't want to worry about the accuracy of pricing non-exchange traded securities and they need to ensure they have matched their books to those of all of their third party providers," Keaveney said.

Stephanie Monaco, a partner in the Washington office of Meyer Brown, recommends that fund managers conduct a "mock" exam to ensure they can pass muster with the SEC or any other regulatory agency with which they are registered. That exam should involve the ability of the firm to retrieve its books and records quickly and any documentation to prove its performance metrics are accurate.

Included in the list of data items should be information on the responsibilities of any supervised executive making investment recommendations, the firm's code of conduct and disclosures of potential conflicts of interest.

"Registration [for hedge funds] is no easy task," Monaco said. "Most of the responsibility for gathering the information for Form ADV to register will fall on the chief compliance officer who might be a dedicated official or the chief financial officer as well."

Filling out the form is the tip of the iceberg. It doesn't take into account the need to develop ongoing operating procedures and to document them, Monaco said. That documentation needs to include which executive is responsible for a particular task.

However, relying on the compliance officer alone won't be enough.

"IT and operations executives will need to stay alert of new rules on their own," said Philip Lawton, a partner in Stone House Consulting, a Thornton, Pa., firm specializing in investment management operations.

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