RISK MITIGATION, MANUAL PROCESSING OF GREAT CONCERN TO FUND
OPERATIONS PROFESSIONALS, SURVEYS SAY
Posted July 28, 2008
Over 88 percent of respondents said that following Société Générale’s
losses from unauthorized trading, they had taken immediate steps to
improve communication between their front-, middle- and back offices in
order to reduce risk. Such communication between counterparties is
critical to risk management controls and the effectiveness of managerial
procedures across all areas of the trading cycle.
“It is very encouraging that nearly 90 percent of respondents are taking
increased measures to protect their firms against risk,” says Lee
Cutrone, Managing Director, Industry Relations at Omgeo. “The findings
of our first Advisory Board Survey clearly indicate the importance of
risk mitigation in the operational frameworks of sell-side, buy-side,
and custodian firms alike. Particularly in such volatile times, we need
to ensure that the market’s operational infrastructure is as shored up
as possible. Indeed, it takes the entire industry’s cooperation, and the
survey shows that this is understood across all parties.”
While most respondents said their firms are proactive in increasing
communication between their front offices and operations, many feel the
industry as a whole does not have the same level of preparedness. Over
50 percent of the respondents agreed that a Société Générale-like
incident is likely to re-occur at another firm within the next 24
months. The Omgeo Americas Advisory Board is comprised of leading
investment managers, broker/dealers and custodians who are using Omgeo’s
services and are active participants in a variety of industry
associations.
Another main risk mitigation concern has been the achievement of
same-day affirmation (SDA) for derivatives trading, as it has been shown
to dramatically reduce the risk of failed trades. Recently, leading
brokers from the Operations Management Group wrote to the Fed stating
their commitment to achieving SDA for over-the-counter (OTC)
derivatives. However, amongst Omgeo’s survey respondents, less than 50
percent agreed that a “best practice” initiative will be successful in
preventing regulation. Over 66 percent of the respondents stated that
regulation may be the only way to achieve broad adoption of SDA across
multiple asset classes. In addition to reducing risk as a driver,
respondents also cited significant cost reduction as a key benefit.
In another survey, in which 115 C-level executives from leading fund
administration firms were polled by Confluence, 80 percent of
respondents expressed concern that multiple manual processes in fund
administration have become an impediment in their ability to control
errors in reporting and documentation for investors and regulators.
Also, 77 percent of these respondents are concerned that manual data
entry challenges their ability to meet reporting deadlines. More than 25
percent plan to centralize their fund administration data into a single
database in the next 12 months.
“The findings support our belief that the industry is serious about employing automation as a strategic initiative to expand their business,” says Kirk Botula, Executive Vice President and Chief Operating Officer of Confluence. “As more of these companies become global, fund administration automation is a critical strategy to increase productivity and reduce costs, while allowing them to grow efficiently and meet regulatory and investor requirements.”