A report written by : Servaas Houben, Chair of CFA UK Economic Capital Special Interest Group after Paul Fulcher’s presentation at Solvency II for the Buy-Side conference held on June 11, 2013.

Paul Fulcher, Head of ALM Structuring at Nomura International plc, has provided an interesting overview how the industry’s view towards Solvency II due to the economic crisis has changed dramatically over the last couple of years. The 1 year Value at Risk metric focuses highly on short term risks, and hence does not stimulate long term investment management. Paul highlighted the several purposes of regulations: not only protecting policyholders, or supervising banks and insurance companies, but also ensuring that financial institutions can provide liquidity or security products to society. Both from the industry and from expert groups severe critique was communicated to the European regulatory body mainly highlighting the tension between market consistent valuation, which focuses on risk reduction on the short term, and avoiding pro-cyclical effects which might be caused by short term amendments to ensure current solvency. Also, regulators haven’t always been very consistent in their approach to long term and short term supervision therefore leading to some confusion from the industry.

Several methods to still earn an excess return in the longer run are using capital to absorb losses, diversifying in different assets and by selling different products with different risks, and by moving risks from the insurance company to policyholders by removing guarantees. The European insurance sector is very diverse and hence different countries require different adjustment to the standard Solvency II framework. Investment in corporate bonds is very relevant for the UK, Ireland and Spain, equity investment in France, government bonds for Italy and Greece while Germany and the Scandinavian countries are concerned on extrapolation of yield curves.

Paul also showed how complex the current proposal is for the matching adjustment and that this may lead to a loss in return as insurance companies are not allowed to investment in non-investment grade bonds and hence cannot wait for recently downgraded investment grade bonds to return to investment grades.

Author: Servaas Houben, Chair of CFA UK Economic Capital Special Interest Group 

Colleen Nichols,
Director, Client Services & Reporting,
TIAA-CREF
Biography 

Colleen shares her views on some of the topics being covered at the Client Reporting & Communications North America conference, June 20 & 21, NYC

QEarlier in the year, TowerGroup anticipated the push towards higher levels of transparency and disclosure to be a major business driver for organizations. To what degree has the push for transparency, in terms of client reporting, had an impact on your operational practices?

Institutional clients in the traditional fixed, equity, and mutual fund space are asking for market commentary monthly, even weekly, instead of quarterly as a window into the economic factors that impact performance. We’ve had to accelerate timelines and critically examine existing processes to gain efficiencies. In the real estate space, institutional clients are looking for real time updates on any major capital expenditure for each property and any significant regional updates.

Q How much do think that a firm being able to distinguish themselves in a competitive landscape is down to the technology systems they use and the ability this brings to aggregate data and map it correctly for their clients?

While data integrity and reporting flexibility is essential, I’m not sure that it matters which technology systems are utilized, as most of the offerings seek to rise to the same level.

QWith more digital reporting becoming cloud-based, do you think that investors may be increasingly concerned about levels of data security? If so, how can investment firms assess their risk exposure?

It is incumbent upon the software vendors to secure proper certifications for all virtual environments. For instance, our department is rolling out an investor portal next month to allow for online access to fund level reports and client statements. The vendor has both SAS-70 Level II and ISO 9000 certifications. Aside from vendor due diligence at the enterprise level, companies need to have their own robust and secure control environment and be able to articulate how they work in a way that is clear to clients.

Q In the current environment investors want more than just stats, they want to know the story behind the data, the reasons decisions were made/risks taken etc. Can you tell us about how much customization you offer your clients? How much data do you think should be made available to clients?

Timely commentary has been the most frequent request from our clients, however, we allow for custom templates, depending on client needs.

QHas the changing face of client reporting over recent years meant that skillset requirements have changed within your department? Is it more about understanding the technological aspect of the client reporting function, as opposed to actual client interface??

Absolutely. Running an operations team that handles direct client requests requires agile, technically astute team members with a client service focus. Fifteen years ago, these skill sets were almost mutually exclusive, where you could find a handful of highly technical, highly client focused individuals. In the global, virtual world, moderate to advanced technical skills are necessary to a successful team. It’s been my experience that in looking for qualified candidates, it’s more important to focus on the soft skills, since most people entering the job force have an almost inherent aptitude for technology.

What’s next?

You can hear more from Colleen and these topics at the upcoming Client Reporting & Communications North America conference being held June 20 & 21, in New York.

To get a comprehensive overview of the conference with your copy of the program, simply complete your details below:

Download full PDF program for Client Reporting & Communications North America 2013.

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Over two thirds (67.8%) of senior data management executives worldwide think modernization of data infrastructure is needed at their particular organization. The good news though, is that 65% of these executives also think it is likely their company will invest in developing their data infrastructure within the next 12 months – this is according to a White paper entitled ‘Key Challenges in Data Architecture’. The survey examined the current state of data infrastructure, as well as respondents’ thoughts on future needs and concerns in this area of their business.

The drivers for investment tend to be led by a combination of internal and external pressures, including assessment of current infrastructure (64.3%) and (unsurprisingly) the increased burden of compliance from industry regulators (28%).

There is also a growing acknowledgement of the need for companies to appoint a chief data officer (CDO) to manage data infrastructure modernization, in addition to creating systems that are simple and clear for users across the business – 76.1% of participants agreed there was a need to employ a CDO. However, only 30.3% of those participants work at companies that already employ a CDO and 61.9% indicated they have no internal plans to appoint an executive to this role.

The survey also looked at what barriers executives encountered when considering data infrastructure modernization – 50.3% of respondents said that cost was an obstacle to change within their organization. Only 5.8% of respondents cited a lack of suitable products and services from vendors, whilst 9.7% said a lack of support from senior management could prevent change in their organizations when it comes to modernizing data infrastructure.

It was encouraging that 35.1% of respondents thought their company’s data architecture to be “just right” with almost half respondents (43.9%) revealing that quality is consistent across the front, middle and back office. A further 32.5% of respondents, however, said data architecture in the front office at their company was of better quality than that of the middle and back offices.

For those about to embark on a new data governance program, Susan Short of T Rowe Price will be speaking at the Buy-Side Data Management conference held in New York on June 20. Susan will be offering an exclusive insight into what T. Rowe Price have learned in their journey through designing, implementing and running a data governance program. She will touch upon the impact regulations have had on data governance and how to manage your resources effectively, post-implementation.

Vincent Di Vasta
Managing Director, Global Head of Performance Analysis & Reporting
Manulife Asset management

Vincent shares his views on some of the topics being covered at the Summit for Performance, Risk & Attribution 2013- North America 

QWhat changes have you seen in the performance analysis and reporting sector in the past six months/year? How have they affected your role at Manulife Asset Management during that time? 

The sales & marketing demands have increased significantly in the last year at our firm. The financial markets are rebounding and investors are taking on more risk while migrating toward active management. Therefore, firms such as ours are aggressively pursuing new business where appropriate. My role becomes stretched as the firm explores launching more and different products across the globe, and we continue to be nearly borderless in our sales approach.

Q There seem to be lots of new technologies out there to help with performance analysis and reporting. Are they really offering anything new/better? Have you changed/upgraded your systems recently (and why/why not)?

The technology around performance is becoming increasingly more mature. The total return space is stable and has been for some time. For attribution; equity is fairly standard, fixed income is seeing the methodologies levelling into fewer camps, and the alternative asset space remains the ‘wild west’. Finding the technology that reflects a firm’s investment process is critical. Each firm has unique demands and properly fitting the technology to those demands is what each firm must consider. Our most recent technological purchases were Barclays POINT for fixed income attribution and the StatPro Composite engine for GIPS composite maintenance. These additions fit in well with our approach and suite of best-of-breed tools.

QPerformance management can mean different things to different people/companies. At Manulife, what does it mean? What do you devote most of your time to as Global Head of Performance Analysis and Reporting?

Performance management is viewed as anything from total return to attribution to risk analysis. We support a multitude of internal clients with each of these elements in proper fashion across all of our products. My role is strategic in nature and most of my time is focused on maintaining an appropriate measurement standard while meeting non-standard client needs. Our clients can be anyone from sales staff to portfolio manager to CEO to our Board of Directors; so our analysts, data and technology need to accommodate disparate needs.

Q Manulife is a truly global company, working in 17 countries. What challenges does this present from a performance analysis/reporting point of view?

Managing the demands of many individual offices with native portfolio management in unique markets is the biggest challenge. Each of our firms began and operated as independent and autonomous organizations for years, and all were accustomed to tailored approaches. Extracting and supporting the common practices while understanding and facilitating the unique solutions of each firm/market is challenging. Also, addressing the data concerns where the market holds imperfect or insufficient information such as pricing/valuation is a key concern. Being based in North America where the data tends to be complete has me spoiled.

QThe updated GIPS handbook has provided a host of new information for professionals in your industry. How to you ensure your employees and clients are all up to date on the latest information and in compliance?

We have a dedicated GIPS analyst, which ensures our policies and procedures are up-to-date across the globe. This person ensures that we are not only current with the latest GIPS handbook, but also any new guidance, Q&A and Executive Council minutes that are required by GIPS. We conduct annual verifications and have very open discussions throughout the year with our verifiers. We have recently implemented an annual training session of all sales and marketing staffs across the globe to ensure there is proper performance reporting to all prospects.

You can hear more from Vincent and these topics at the upcoming Summit for Performance, Risk & Attribution 2013 – North America conference being held June 19 & 20 in New York.

To get a comprehensive overview of the conference with your copy of the programme, simply complete your details below:

Download full PDF program for The Summit for Performance, Risk & Attribution 2013

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State Street Corporation have announced enhancements to its financial reporting and collateral services this week to help clients comply with regulations, manage risk and automate their disclosure requirements.

State Street has released its new ProNavigator solution as part of its enhancements allowing asset managers to automate their registration forms in multiple formats. The new solution enables auto-composition and helps to streamline requisite disclosures across multiple fund registrations. It provides clients with one source documentation reducing the risk of regulatory reporting errors.

In line with Dodd-Frank initiatives, State Street has also expanded its tri-party collateral custody capabilities to all clients and broker dealers to help mitigate risk and maintain control of pledged assets. The new solution, Collateral Custody Service, provides a segregated account structure and can be offered as an independent, stand-alone service or as a component of broader solutions. It compliments State Street’s DerivOne suite, an end-to-end derivatives solution that includes servicing, custody and accounting, collateral management, valuation, and risk and analytics.

State Street’s solutions will help bolster asset managers‘, investors’ and intermediaries’ efforts to manage risk and comply with regulation. According to data from State Street’s Center for Applied Research, investment in risk analytics and improving regulatory compliance ranked within the top three strategic operational priorities for the next ten years.

Jim Tessner, senior vice president of State Street will be part of a panel discussion discussing the future of financial reporting and information delivery at our Client Reporting & Communications conference ( TSAM NA) in June in New York. Some of the themes covered in this panel discussion will include how the user experience is changing, and how the way we consume information is changing and impacting upon reporting. He will be joined on the panel discussion by Thomas Secaur of Citisoft. Rick Sands at SS&C technologies and Becky Nanberg of MFS Investment.

Global consultants McKinsey & Co recently released an interview with one of its directors, who believes that advanced analytics will be a major game changer for the finance industry going forward, allowing banks to reinvent themselves and gain a huge competitive advantage, much like they did with the “dawn” of IT in the late 80s/early 90s.

In the interview, Toos Daruvala, a director in McKinsey’s New York office, explained that, “Typically, the near-end applications that we see are in marketing and customer-sales leads and lead generation and on risk management. Both are disciplines that have historically used information pretty well. But I think we are now at the next frontier in terms of using both data and analytics to drive revenue generation through marketing, through next-product-to-buy, through lead-mining models like that, as well as to drive better risk decisions.”

Indeed, he believes data and analytics will be the major differentiator for the industry, with other banks playing catch-up. “Every single major decision to drive revenue, to control costs, or to mitigate risks can be infused with data and analytics. [This] will be a differentiator for some period of time … So there’s an opportunity here if you choose, as an institution, to be thoughtful about where you make some smart, targeted investments. Do you use data and analytics to drive growth in the business, to drive better risk behaviors in the business, and to reduce costs across the business?” Perhaps it’s time to venture into the Wild West if you haven’t already.