OPERATIONS UNDER PRESSURE

Transcription

1 OPERATIONS UNDER PRESSURE The need to make data mean business GLOBAL ASSET MANAGEMENT STUDY 2014

2 Introducing the Global Asset Management Study 2014 More than five years on from the global financial crisis, the asset management industry continues to adjust to its consequences. With margins and fees in decline, firms must seek new ways to achieve growth and increase efficiency while, at the same time, navigating a growing range of regulatory and investor requirements. In an increasingly complex global investment landscape, how are asset managers and servicers meeting the resulting demands on their middle- and back-office operations? To find out, SunGard has sponsored a global study by Aite Group 1. Research details From March to May 2014, Aite Group carried out a global survey of 37 asset managers and 21 asset servicers, representing a 64%/36% split between the two types of organization. Survey respondents were mostly operations staff and to a lesser extent technology and finance professionals. The majority hold senior or executive positions with responsibilities in the middle and back office. In terms of assets under management, the respondent base reflects the overall asset management community, with 46% managing assets of less than $20 billion, 49% between $20 billion and $750 billion, and 5% $1 trillion or more. In combination, all the firms surveyed manage or administer a total of more than $62.5 trillion in assets. Of these, the asset management respondents collectively manage in excess of $10.5 trillion, while the asset servicers have more than $52 trillion in assets under administration. Most respondent firms have their headquarters in the US (35%) and Europe (31%), with operational sites around the world. Report scope On an operational level, Aite Group s study underlines three areas of growing importance and concern for asset managers and servicers. Based on the research findings, this report will address: the impact of business diversification on asset management operations; the need and means to achieve operational effectiveness; and increased pressure on data, as operations strive to meet new demands on risk management, reporting and reconciliation. Addressing each of these themes will highlight both the challenges faced by the fund administration lifecycle and innovative ways that firms are starting to resolve them. 1 Aite Group, 2014 Global Asset Management Survey of 58 asset managers and asset servicers conducted from March to May Aite Group gathered the raw data for the 2014 Global Asset Management Survey and SunGard is responsible for the interpretation of this data resulting from the survey.

3 Business diversification According to Aite Group, the asset management industry continues to bifurcate into extremes of size and scale. At one end of the spectrum, large global organizations are getting larger still. At the other stretches a growing sea of small firms. This increasingly diverged and competitive market is driving asset managers of all sizes to broaden the scope of their investments, and look to a greater range of products, instruments and territories to improve returns for their investors. While expanding globally into new geographies has the potential to offer greater returns, it can also introduce new complexities, risks and challenges for investment processes, including: Managing regulation globally across jurisdictions Expanding their global footprint is a key priority for asset managers and servicers. The survey found that moving from a country-level to a global approach is important for 78% of firms, who see better support for their global client base as an important operational goal over the next 12 to 18 months. 72% of asset managers and 83% of asset servicers in the survey currently operate in multiple jurisdictions, thereby having to manage the challenges of cross-border investment accounting. In their combined experience, the biggest obstacle to entering new territories, for 35% of respondents, is the wide variation between regulatory reporting requirements from country to country. Q. What is the greatest operational challenge in expanding your global footprint by entering new territories? (n=52) Variations in regulatory reporting requirements Our operation is not expanding globally Risk inherent in processing delays and inaccuracies Domestic use of paper-based and manual processes Multiple tax requirements Nointegrated technology platforms Complexity of cross-border investment accounting Use of local OTC derivatives 10% 8% 8% 4% 4% 2% 29% 35% Regulation is challenging firms large and small in almost equal measure. Many smaller firms are struggling to find the resources, in terms of both people and technology, to meet growing regulatory requirements. But while larger, multinational organizations can achieve economies of scale through opportunities to cross-sell to clients, they also face a tremendous amount of risk and compliance work to keep up with multiple regulators around the world. Thanks in particular to the broad reach of its rules across geographies, not to mention its high levels of complexity, the US Foreign Account Tax Compliance Act (FATCA) emerges from the survey as the most challenging regulation

4 for asset managers and servicers, for 51% of respondents. Almost as problematic is the Alternative Investment Fund Managers Directive (AIFMD), for another 44% of firms. AIFMD s prominence in the research findings is likely to reflect both high levels of operational activity in Europe, where most firms (46%) anticipate the greatest growth, and the increased usage of alternative funds by traditional asset managers. Also considerably challenging are the US Dodd-Frank Act, for 39% of asset managers and servicers, and the European Market Infrastructure Regulation (EMIR), for another 37%. Like AIFMD, these regulations have significantly affected firms active in the derivatives markets over the last two years, making them top of mind for those trading in the US and Europe. Q. Which of the following regulations represent a considerable challenge to your organization today? (n=51) U.S. Foreign Account Tax Compliance Act (FATCA) Alternative Investment Fund Managers Directive (AIFMD) U.S. Dodd-Frank Act European Market Infrastructure Regulation (EMIR) Other (Please specify) Markets in Financial Instruments Regulation/Directive (MiFID II) Solvency II Capital gains tax updates UCITS V International Financial Reporting Standards updates UCITS VI Basel III European Financial Transaction Tax (FTT) Central Securities Depositories Regulation (CSDR) Standardized commission reporting Target2-Securities UK's Retail Distribution Review Ireland's Central Statistics Office (CS0) reporting 22% 20% 14% 13% 14% 11% 9% 9% 8% 7% 7% 4% 4% 39% 37% 44% 51% Consolidating fund administration With many operating multiple sites around the world, asset managers and asset servicers are taking a largely centralized approach to managing cross-border investment accounting and regulatory requirements. For a quarter of asset managers, centralized operations processing and offshore outsourcing are equally the most frequently adopted solutions. Given their diverse client bases, asset servicers, however, place even more importance on centralized processing: exactly half operate multiple centers of excellence with either a regional focus or to perform a specific operational activity. Almost as critical, for 44% of asset servicers, is a seamless, integrated technology solution across these sites, as larger pools of global clients increase speed and automation needs.

5 Q. How are you managing the challenges of investment accounting across jurisdictions? (n=50) Centralized operations processing 34% A seamless, integrated technology solution Outsourcing specific functions to an offshore location 30% 28% We do not have multiple jurisdictions 24% Separate, non-integrating servicing centers/hubs 18% Coping with a variety of local regulations and tax laws is clearly a primary maintenance responsibility for both asset service providers and their accounting technology vendors, and driving the increased consolidation of technology solutions and services. That said, nearly a quarter of all firms surveyed by Aite Group (24%) still claim to operate four to five separate portfolio management and accounting systems. Q. How many separate portfolio management and accounting systems does your firm use globally? (n=51) More than 5 8% 4 to 5 systems 24% 1 system 39% 2 to 3 systems 29% While 47% of asset managers use only one system, 65% of asset servicers run between two and five systems on a global basis. Handling complex instruments The past decade has seen the progressive convergence of traditional and alternative investment approaches. Today, mainstream, previously long-only asset managers are just as likely to invest in complex derivatives products as hedge funds. As a result, the asset management market is seeing an ongoing rise in the usage of complex investment instruments such as over-the-counter (OTC) derivatives and alternative investment vehicles such as hedge funds.

6 In its research, Aite Group found that registered mutual funds are currently the most important investment vehicle, a high priority for 62% of asset managers and servicers, followed by institutional separate accounts (46%), institutional commingled vehicles such as unit trusts (39%) and hedge funds (39%). But notably, firms anticipate increasing their business the most in hedge funds, with 63% predicting the growth in use of this vehicle from 2014 to Q. In the 2014 to 2016 period, your business in this product will... (n=48) Hedge funds 63% 20% Registered mutual funds 32% 55% 11% Private equity funds 54% 29% Institutional separate accounts 35% 50% Separately managed accounts 26% 49% 23% Offshore mutual funds 23% 49% 29% Institutional commingled vehicles (unit trusts, securities investment trusts) 33% 38% 29% Exchange traded funds (ETFs) 25% 36% 36% Canadian mutual fund companies 21% 4% 76% Decrease Remain the same Increase Don't know And although equities and fixed income remain the most important investment asset classes, for 74% and 58% of respondents respectively, OTC derivatives are already ranked next in line, at 36%. Meanwhile, by 2016 firms anticipate the biggest increases to have taken place in cleared derivatives (63%), equities (62%), fixed income (53%) and OTC derivatives (52%). Q. In the 2014 to 2016 period, your investment in this asset class will... (n=40) Cleared derivatives 13% Equities 3% 24% Fixed income 6% 25% OTC derivatives 11% 19% Bank loans 4% 20% Foreign exchange 45% Exchange-traded futures 3% 33% Inflation-linked bonds 4% 41% Exchange-traded equity options 33% Commodities 7% 36% Repo/reverse repo 4% 58% Convertibles 0% 64% 63% 62% 53% 52% 44% 41% 37% 35% 30% 25% 12% 25% 11% 17% 19% 32% 14% 27% 21% 37% 32% 23% 24% Decrease Remain the same Increase Don't know Along with the steady growth of more complex derivatives instruments come major operational challenges, not least because of regulation. Both Dodd-Frank and EMIR make it imperative for counterparties to OTC derivatives trades to

7 interact with a growing number of new infrastructures such as trade repositories and central clearing counterparties; in Europe, under EMIR, these requirements involve the buy side as well as the sell side. Between 2007 and 2012, the percentage of OTC trades cleared centrally climbed from 16.1% to 50.4% and will keep rising, increasing the complexity of post-trade operations. At the same time, OTC derivatives counterparties must manage increased collateral requirements and monitor collateral much more actively on an intraday basis moving collateral management from a passive post-trade-only activity to a front-office optimization strategy. There are also new reporting requirements to adhere to, higher volumes of data to process and, in particular, major reconciliation challenges to consider for asset managers and servicers. For example, according to EMIR, the legal entity identifiers of both counterparties to a trade must now be matched and a single unique trade identifier (UTI) generated for the trade. These in turn must be reported to a trade repository. What is more, while Dodd-Frank demands that only one counterparty reports on a bilateral derivatives trade, EMIR states that both counterparties to a trade are responsible for reporting it. So, although most buy-side firms are likely to ask their broker to manage reporting duties on their behalf, it is still ultimately their responsibility to provide compliant data for the regulator, and consistently ensure the broker s reporting data matches their own records of derivatives trades. In combination, these requirements will introduce a new set of external and internal reconciliation duties for the buy side, placing unprecedented demands on their fund accounting platforms. Yet, bearing all the above challenges in mind, around a third of asset managers and servicers (33%) told Aite Group that, although their current fund accounting platform was sufficient, it was also limited in its scope of capabilities and costly to maintain. More than a quarter (27%) say their system requires enormous rework to accommodate changes, while around one in five claim theirs has deficient workflow to support global operations. Q. Would you describe your current fund accounting platform as...? (n=48) Costly to maintain Limited in scope of capabilities Sufficient Requiring enormous rework to accommodate changes Difficult to maintain Modern/State-of-the-art Deficient work flow to support global operations Flexible in meeting changes, e.g., new regulations or investment products Antiquated / Nearing the end of its lifecycle Integrated seamlessly Other: Outsourced 33% 33% 33% 27% 25% 25% 21% 21% 10% 8% Interestingly, while asset servicers complain more about the cost of maintaining their system than asset managers (63% versus 22%), 44% also feel their solution is state of the art. This opinion is likely to reflect the large technology

8 investments made by asset servicers in recent years and the importance they place on the merits of infrastructure. At the same time, 31% note both the burdensome rework requirements and the limited scope of their system. Here, however, the system itself may be no more to blame than the growing complexity of firms regulatory and operational environment and the pressure of managing an increasingly globalized client base. What remains clear is that the buy side is stepping up positions in non-equity asset classes across the globe. To support growth, portfolio accounting technology must therefore have the flexibility to support increasingly diverse portfolios of ever more complex instruments.

9 Operational effectiveness To manage the pressures of its fast-moving, globalized, multi-product environment, while helping achieve growth, the asset management industry is looking to increase the efficiency, speed, effectiveness and scale of its back- and middle-office operations. In its research, Aite Group reveals that enhanced operational controls and increased efficiency through automation are the two most important goals for firms middle- and back-office operations, for 83% and 81% of firms respectively, followed by improved productivity through workflow (79%). When it comes to achieving these objectives, asset managers and servicers are focusing on three key strategies: Creating greater transparency Data transparency is a key concern for asset managers and servicers, as they aim to manage increased regulatory, compliance and audit requirements across new, more efficient but globally distributed operational models. Regulation especially is putting pressure on firms to improve transparency through their operations. When asked by Aite Group where they felt this pressure most keenly, the top response, by 56% of firms, was in the field of risk data, followed by valuations and pricing (49%) and client data (44%). Q. Where have you witnessed the most regulatory pressure toward technology transformation to improve transparency? (n=55) Risk data 56% Valuations/pricing Client data 44% 49% Performance and analytics Reference data management 33% 33% Counterparty data 25% Other 4% The link between regulation, risk data and transparency has tightened since the financial crisis. With regulators now probing portfolios in unprecedented ways, it is becoming increasingly difficult for firms to conceal shortcomings in their ability to extract, aggregate and provide an audit trail for risk data. So, in a world still clinging to Microsoft Excel for valuation modeling and record keeping, the systematic centralization of client and portfolio data is a growing necessity. What s more, those who indicated that better support for data aggregation is a "very important" goal for middle-and back-office operations in the next 12 to 18 months, are more likely to be evaluating technology in the areas of data quality and data management in the next three years.

10 A particular challenge for the management of risk data is how to aggregate results at enterprise level, as the relevant data sets are often spread across multiple systems, with no consistency in their taxonomy. In fact, Aite Group s survey has established that the top business challenge today, for 68% of respondents, includes increasing regulation and the challenges of aggregating data. Q. What are the top 3 business challenges your firm faces today? (n=57) Increasing regulation and the challenges of aggregating data on an ad hoc basis for reporting as well as regulation targeted at altering changing practices* 68% Achieving and managing efficient operations 44% Keeping firm-wide technology current and relevant 42% Reducing operational cost 30% Reducing operational risk 26% Retaining the right employee skill sets and expertise 23% Increasing competition (fee pressures forcing acquisitions by stronger players) 21% Globalizing products in search of alpha 16% Investor demands for greater transparency (fees, valuations, etc.) 14% Other (Please specify) 7% Conversely, risk teams may also need enterprise data to be de-aggregated and examined at a more granular level. This means being able to track where a particular data item is stored, whether it has been changed, and who may have altered it. For transparency s sake, there is thus an urgent need for firms to establish a level of consistency across systems in the way they reference individual data items, or add a common data layer that sits above these systems, from which data can be extracted and tracked for both aggregation and auditing. Another area of the asset management ecosystem that can benefit from far greater transparency and automation is that of collateral management. Currently, there is no all-encompassing network between financial institutions to interconnect collateral givers and takers in an efficient way. Collateral assets, furthermore, are almost always held locally, while mobilizing them is a time-consuming manual process, with high operating costs. Even the basic ability to determine collateral inventory across geographies is a significant challenge. As collateral optimization remains a very immature practice for most, if not all, financial institutions, asset management firms are frequently turning to third parties for support with, for example, derivatives collateral and clearing requirements. Aite Group s survey, meanwhile, has indicated a link between sound collateral management and overall efficiency. Along with combined accounting books of records (ABOR) and investment books of records (IBOR) functionality, firms that see collateral management as very important or somewhat important tend to also value efficiency and

11 automation. Those that value productivity more highly, however, place more importance on investment performance and client billing systems. Outsourcing non-core back-office tasks and infrastructure In 2014, according to Aite Group, the majority of asset managers and servicers (59%) anticipate spending less than $50 million in total on IT, including software, hardware and salary costs. 6% estimate IT costs of between $50 million and $100 million; 4% of between $100 million and $250 million; 2% of between $250 million and $500 million; and 6% of $500 million or more. Q. What is your company's anticipated total IT spend for 2014? (including software, hardware, salaries) (n=51) US$100 million to less than US$250 million US$500 million 4% or more 6% US$50 million to less than US$100 million 6% US$250 million to less than US$500 million 2% Not sure or will not dislose 23% Less than US$50 million 59% Considering the scope of their operations and the breadth of their client base, it is logical that asset servicers will spend more on technology than asset managers, with 59% (versus 30%) expecting IT costs in 2014 of more than $50 million. In general, Aite Group s research shows that both asset managers and servicers are exploring alternative methods of deploying technology software to simply installing it on-site and managing it themselves. On average, of 21% to 40% of a firm s software, 41% is currently delivered as an externally hosted or managed service. And of up to 20% of software, 42% is delivered as an externally hosted managed service, under an application service provider (ASP) or software as a service (SaaS) arrangement. For the large majority of software (81-99%), nearly a quarter (22%) is now a third-party vendor purchase rather than a proprietary solution. Opinions are split over externally hosted cloud environments, where infrastructure is essentially outsourced to a specialist provider. While 43% of asset managers and servicers have a medium interest in cloud deployment, but only where it makes business sense, 29% are showing high interest. And although some have strategically prioritized cloud, well over a quarter (28%) are not even considering the technology.

12 Another, previous study by Aite Group has revealed that most firms will apply cloud deployments to specific, disparate functions, rather than as an enterprise-wide program of work. For asset managers the focus is primarily on private clouds, with public clouds of interest only for non-sensitive information, such as for testing and marketing purposes. The benefits of cloud are clear: reduced total cost of ownership through shared hosting, maintenance and resources costs; a shift from upfront capital expenditure to flexible, pay-as-you-go operating costs; faster time to market; scalability; 100% availability of mission-critical channels; and no data loss or disaster recovery issues for the customer. But there are palpable concerns about: security, especially in the context of a public cloud; reliability, availability and performance; lack of control; migration from a legacy platform; and privacy when data is stored offshore. Q. What is your firm's overall interest level regarding hosted or "cloud" deployments? (n=51) Little or no interest 28% Medium, where it makes business sense 43% High interest/strategic initiative 29% While a much-debated option for today s financial services organizations, hosting in the cloud is only part of the outsourcing story. Today, many outsourcing arrangements go beyond infrastructure and even application management to embrace the end-to-end running of certain operational activities or business processes, as a fully hosted and managed service. In Aite Group s survey, 66% of asset managers and servicers say they outsource some form of operational activity to a third party. Asset managers, as expected, are highly active in this sense, with 76% outsourcing an operational activity. Although less so, asset servicers are also reaping the benefits of outsourcing to meet diverse client requirements. According to the survey, nearly half (47%) currently outsource an operational activity. Regionally, outsourcing appears to be more common in European markets than in North America. In Europe a greater range of functions are outsourced from the middle and back office, especially transfer agency, OTC derivatives processing and valuations, and corporate actions processing. This could potentially be due to higher levels of cross-border complexity in the region. North American firms, on the other hand, tend to have globally centralized operations, with lower levels of in-house managed services but higher levels of in-house deployed software and a greater interest in cloud technology.

13 Overall, in Aite Group s study, 56% of asset managers outsource back-office functions, including accounting, reporting and custody, and 30% outsource middle-office functions such as reconciliation, investment performance and collateral management. While accounting and transfer agency are the areas most likely to be outsourced by asset managers, there seems to be a unanimous decision around the world to keep client reporting and regulatory reporting in-house, due to liability concerns. The market overall also seems unsure about whether or not to outsource corporate actions, collateral management, OTC derivatives processing and OTC derivatives valuation, as increased regulatory scrutiny make these areas of high reputational and financial risk. Q. How best would you describe your firm's fund administration operations relative to outsourcing? (n=27) Outsource back office functions (accounting, reporting, custody) to a third-party provider 56% Insource model: middle -office operations are performed in-house with internal teams 48% Outsource middle-office functions (reconciliation, investment performance, collateral management) to a third-party provider Insource model: back-office operations are performed in-house with internal teams 26% 30% Other (Please specify) Hybrid model: We insource much of the functions related to new markets and more complex investment types, but choose to outsource certain territories and products to a third-party provider. Hybrid model: We insource much of the functions related to mature markets and less complex investment types, but choose to outsource certain territories and products to a third-party provider. 19% As Aite Group has noted, regulatory bodies in both the UK and the US have shown concern about third-party relationships. In the UK, to reduce systemic risk, the Financial Conduct Authority has essentially asked asset managers to support more active assessment of their servicers and regularly report on their performance. Boards now need to ensure they have an adequate resilience plan in place should the provider of a regulated activity fail. In the US, the Office of the Comptroller of the Currency has issued guidelines on a continuous lifecycle for vendor management, including planning, due diligence, monitoring, reporting and independent review processes. The bottom line is that, to satisfy regulators, asset managers will need to more actively manage the data they receive from outsourcing relationships, through higher levels of reconciliation and monitoring. It is also in their interest to add a technology-based disintermediation layer to their operations, to prove they can move easily from one third-party service provider to another. Improving risk management Accurate, consistent data is the bedrock of effective fund administration. So, as well as reducing their IT overheads through outsourcing, asset managers and servicers need to mitigate the huge risks created by inaccuracies, which in turn can result in incorrect net asset value (NAV) calculation and prices, and even missed trades. As Aite Group s

14 research has established, mission-critical back-office activities are fundamental to reducing operational risk in this way, most of all reconciliation: very important for 89% of surveyed firms. Other critical back-office activities include pricing accuracies (84%), data management (83%), regulatory reporting (82%) and NAV striking (80%). Q. How important are these mission-critical back-office activities to mitigating operational risk? (n=52) Reconciliation 9% 89% Pricing accuracies 12% 84% Data management 17% 83% Regulatory reporting 16% 82% NAV striking 12% 80% 8% Corporate actions 4% Shareholder reporting 25% 35% 69% 63% Not at all important Somewhat important Very important Not applicable A range of additional factors, however, also come into play. 90% of firms say the expertise of people makes a very important contribution to back-office risk mitigation, along with efficient workflow processes (82%) and the right technology (82%). Automation is also key to improving back-office efficiency and reducing operational risk. But less than a third of asset managers and servicers (30%) envisage that their critical NAV production processes will be almost fully automated in the next three years, while just over a quarter (28%) think up to half might be automated by Although not overly optimistic in this regard, neither are firms complacent about the technology at their disposal. 64% will be reassessing their back-office technology strategy within the next three years, and many of the remainder may have done so already in the last two years. Such reevaluation plans seem especially likely for asset managers and servicers that purchase mainly third-party software. 53% will plan to reassess their strategy in 2014 and 87% in the next three years, compared to 47% and 13% of those that mainly build software in-house. What s more, use of a key contributor to automated efficiency, the workflow tool, is growing. 46% of survey participants already use workflow solutions to increase automation and another 29% plan to do so soon. Fast exception resolution and improved communication across an enterprise are two key drivers for the use of these tools. When operations are performed in-house, such solutions tend to be used more in the middle office than the back office, and by those that value expertise and data governance as well as efficient processes.

15 Pressure to leverage data Today s investment world is increasingly hungry for data. Historically, however, the number of ways a particular system s data can be used and analyzed has been limited typically for only one discrete purpose within the financial ecosystem and putting pressure on data operations as a whole. Innovations in technology are signaling the end of this segregated approach to data, allowing the input of a single data source to become multi-faceted and able to support any number of calculations and fund administration services. This in turn will help asset managers and servicers support three key aspects of data management: Accessing high-quality data Asset managers and servicers clearly recognize the growing importance of data management. The survey has found that, of all types of technology for the middle to back office, 42% of firms anticipate requiring data management solutions most over the next three years. The need is being driven predominantly by risk management, cited as the most demanding source of back-office data requirements and analysis. Q. Over the next 3 years, what type of technology do you anticipate your firm needing most in the middle to back office? (n=50) Client reporting Data management Risk analytics Collateral management Data quality or data distribution tooling Compliance solutions Investment performance Reconciliation Client billing Portfolio accounting solutions Combined ABOR (portfolio accounting) and IBOR (portfolio management) solution We do not anticipate needing any new or replacement technology Transfer agency 44% 42% 38% 33% 31% 31% 27% 27% 23% 19% 17% 17% Other (Please specify) Real-time tax book 6% 6% Q. What is the most demanding source of back-office data requirements and analysis? (n=51) Risk management Regulators Front office Internal audit Investors Middle office Chief compliance officer Executive boards Sales team Brokers/Advisors 49% 49% 39% 31% 29% 28% 24% 18% 12% 8%

16 Regulation such as Basel III is now demanding greater amounts of portfolio data and evidence of risk analytics from financial institutions. In January 2013, the Basel Committee on Banking Supervision (BCBS) published a set of risk data aggregation standards for top-tier firms, including asset servicers by default. The resulting focus on improving the management of data underlying risk calculations is likely to hit bank-owned firms hard, as well as asset servicers that are also custodians. So, as asset managers attempt to navigate uncharted investment markets and manage global macroeconomic trends with more tool sets, the management and accessing of investment data is becoming an increasingly complex challenge. Of this challenge, firms surveyed by Aite Group are struggling most with ensuring data accuracy, a problem for 58% of asset managers and servicers, ensuring consistent data (54%), ad hoc reporting support (50%) and having enough data granularity (48%). In other words, the overall quality of data is proving critical to meeting the demands of external and internal data consumers in terms of data aggregation, provenance and lineage. Q. What are your biggest challenges when managing investment data? (n=50) Ensuring data accuracy Ensuring consistent data Ad hoc reporting support Having enough data granularity Keeping costs down Prioritization of business user demands Aggregating data Data extraction Latency of data provision Onboarding new data items Latency in exception resolution Getting business-level support Other: reconciliation 2% 18% 18% 18% 18% 58% 54% 50% 48% 44% 40% 36% 34% The timeliness of data provision is also vital, although more so in North America than Europe. 77% of surveyed North American firms feel pressure to move to intraday or real-time data, but only 56% of firms headquartered in Europe indicate the same. This may be due to a prioritization in Europe, for regulatory reasons, of data quality and accuracy over timeliness. Although the most important type of data for today s asset managers and servicers, support for risk management data is also seen to be less mature than for other data types. Over half of surveyed firms (51%) see their risk data operations as either fairly immature or the least mature. By comparison 46% say the same about performance and analytics, 42% about corporate actions and 40% about security master operations. Risk data s ostensible immaturity could, however, be due to its heavy reliance on the aggregation of data rather than single sets. The more aggregation required, the more data quality issues will be highlighted. And in terms of aggregation, Aite Group concludes that most firms are at an early stage of the data maturity curve.

17 Risk management data Please indicate the level of operational maturity your firm has in support of the following types of data: (n=47) 17% 34% 43% 6% Legal entity 9% 30% 46% 16% Performance and analytics 9% 37% 37% 17% Corporate actions 7% 35% 50% 9% Securities master 7% 33% 52% 9% Market data 6% 21% 51% 21% Pricing 4% 11% 62% 23% Compliance data 36% 57% 4% Positions and transactions 55% 28% Least mature Fairly immature Mature Most mature In the survey, firms who indicate that better support for data aggregation is a very important operational goal are more likely to invest in data quality and data management solutions. Those less focused on aggregation demonstrate a greater short-term need for compliance technology. This reveals a tactical split across the asset management industry, between a fire-fighting approach to compliance and long-term strategic improvements to data management. For those that take the former approach, data silos will ultimately hinder the ability to grow and scale their business. At the same time, data management teams must deal with wide variations in end-user applications, as business process outsourcing and application outsourcing increase. To this end, some asset managers are using a data warehouse or hub to act as an insulation layer between their firm and third parties, to enable links with multiple providers. Standardizing and enhancing reporting For today s asset management community, client reporting emerges as even more critical than data management. In Aite Group s survey, 44% of asset managers and servicers anticipate needing client reporting technology most in their middle to back office over the next three years. The fact is that firms must deliver more than investment returns to retain clients, with client reporting a clear differentiator. Effective reporting means quick turnaround times, clear visualization of portfolio data and consistent client communication. Modern client reporting platforms can meet all these requirements and more: automating intermediary reports and sales presentations, and aggregating, integrating and managing reporting across a firm s operations, for regulatory purposes. Both regulatory and client reporting requirements across a broader range of instruments are also driving the need for better risk analytics systems. Nevertheless, only a small minority of asset managers and servicers (17%) have an integrated fund accounting and financial reporting platform that supports both traditional and alternative funds.

18 Partially as a result, manual processes are still a common means of responding to ad-hoc reporting requests. Only 12% of surveyed firms can respond with ease using an automated solution; 69% use a combination of manual and automated processes; and 19% use mostly manual processes. Q. How well does your firm respond to ad-hoc reporting requests? Is it... (n=51) Automated and easy to respond to ad-hoc needs 12% Mostly manual process 19% Combined manual and automated processes 69% Completing multi-faceted reconciliations A number of external pressures are making matching processes increasingly complex for the back offices of asset managers and servicers. According to Aite Group, the reconciliation environment is most under strain as a result of data aggregation requirements for regulatory reporting, for 49% of firms, trade automation (41%) and client reporting requests (37%). Q. What external pressures that you face are straining reconciliation processes? (n=41) Data aggregation for regulatory reporting 49% Trade automation 41% Client requests Direct regulatory requirements for portfolio reconciliation Market infrastructure and connectivity requirements 27% 32% 37% Other: volume 2% Data silos, a common problem across the asset management industry, are compounding the reconciliation challenge and help explain why data aggregation is such a prevalent issue. While some firms have tackled or begun to tackle silos in the context of reference data, most have neglected more operationally focused data sets across their business. Data improvement programs tend to be inconsistently applied across data sets, making it hard to cross-

19 reference between sets: combining, for example, positions and transactions with legal entity data. And when assessing data quality, most organizations have looked at individual data sets in a static manner, evaluating them on the basis of cleanliness and data quality rather than the data s downstream usage and appropriateness. Consequently, many firms are only adding to their reconciliation requirements. Together, asset managers and servicers use reconciliation technology mostly for transactions and positions (73%), cash (69%), trade confirmations (56%) and between third-party service providers and in-house records (54%). More asset servicers use a reconciliation solution than asset managers (94% versus 81%), and the latter places more importance on reconciling with third-party providers, for improved oversight and decreased operational risk. There is a relatively even split between firms that outsource or plan to outsource reconciliation processes (47%) and those that want to keep them in-house (50%). The decision not to outsource is often tied to the desire to keep control of internal processes. Q. In which areas are you currently using reconciliation technology? (n=48) Transactions/Positions Cash 69% 73% Middle-office trade confirmations/affirmations Between third-party service providers and inhouse records Corporate actions 40% 56% 54% Internal reference data Collateral inventory Internal derivatives data We do not use reconciliation software 25% 19% Other: internal reconciliation 2% Although most firms (67%) are satisfied with their reconciliation solutions, Aite Group s survey results indicated that many are refreshing reconciliation technology, most typically to improve support for global clients. More than a quarter (27%) anticipate needing reconciliation technology most over the next three years, with other drivers for purchasing a new automated solution include: regulatory pressure to demonstrate control; the move to real-time processes; cost reduction; business pressure to diversify into other asset classes; fraud issues; and changes to market infrastructure. Aite Group also found that firms not planning to invest in reconciliation technology may be facing pressure elsewhere, such as in pricing and valuation activity.

20 Conclusion As the details of regulation continues to be fleshed out and new requirements take effect, the resources of most asset managers and servicers are still consumed by compliance. But many firms who put technology purchases on hold during the financial crisis are now resuming enhancements to their fund accounting systems and associated middleand back-office solutions, with the desire to become more efficient, automated, accurate and service-oriented. Given the many changes to market and industry infrastructure in recent years, it is hardly surprising that organizations are still grappling with core operational issues. The improvement of efficiency and automation is ongoing: a process that, as challenges evolve and new lessons are learned, is possibly never truly complete. Certainly, these are times of almost unprecedented development for the global investment environment, creating new levels of pressure and complexity for middle- and back-office operations. Tackling this complexity requires, in particular, a new approach to data management. Data is the lifeblood of fund administration processes and needs to be both accurate and readily available. Yet as Aite Group s research shows, it is all too often generated by multiple, disparate systems. The usual lack of integration between these data sources makes crucial information harder to aggregate for regulatory and risk reporting, and can lead to duplicated and redundant processes. Above all, it fails to capitalize on the symbiotic relationships that exist between fund administration processes. Put simply, what happens in one operational area will typically have an impact on another. By integrating their operations to create a single, robust ecosystem, asset managers and services can make more meaningful, efficient use of data. This in turn will allow them to ease the mounting pressure on their operations putting them in a stronger position to manage the forces of globalization and become operationally more effective.

21 ABOUT AITE GROUP Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, securities & investments, and insurance, Aite Group's analysts deliver comprehensive, actionable advice to key market participants in financial services. Headquartered in Boston with a presence in Chicago, New York, San Francisco, London, and Milan, Aite Group works with its clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they remain at the forefront of industry trends. For more information on research and consulting services, please contact: Aite Group Sales sales@aitegroup.com ABOUT SUNGARD FINANCIAL SYSTEMS SunGard Financial Systems provides mission-critical software and IT services to institutions in virtually every segment of the financial services industry. The primary purpose of these systems is to automate the many detailed processes associated with trading, managing investment portfolios and accounting for investment assets. These solutions address the processing requirements of a broad range of users within financial services, including asset managers, traders, custodians, compliance officers, treasurers, insurers, risk managers, hedge fund managers, plan administrators and clearing agents. In addition, we also provide professional services that focus on application implementation and integration of these solutions and on custom software development. ABOUT SUNGARD SunGard is one of the world s leading software and technology services companies. SunGard serves approximately 25,000 customers in more than 70 countries and has approximately 17,000 employees. SunGard provides software and processing solutions for financial services, education and the public sector. SunGard also provides disaster recovery services, managed IT services, information availability consulting services and business continuity management software. With annual revenue of over $4.0 billion, SunGard is one of the largest privately held IT software and services companies. For more information, please visit: Contact us am.solutions@sungard.com NEW YORK Tel: BOSTON Tel: SAO PAOLO Tel: PARIS Tel: LONDON Tel: FRANKFURT Tel: SYDNEY Tel: SINGAPORE Tel: SHANGHAI Tel: HONG KONG Tel: