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Fund Managers Want To Correct Errors of Ways

Fund managers are always looking for solid returns and growth in assets under management.

But they also want to reduce their operational risk, according CityIQ, the London-based financial services consultancy. Simply put, they want to reduce manual errors.

"Manual processing of corporate action events is a top cause of mistakes," said Dave Kubersky, managing director of SimCorp North America, an investment management technology firm. "Fund managers still send their custodian banks, emails and faxes of their decisions, which must be interpreted, transcribed and input into electronic systems."

In the best case, errors add unnecessary expense, in every day operations.

Worst case, a significant error in the middle or back office could result in millions of dollars being doled out to compensate investors or counterparties. In some cases, media headlines and regulatory fines ensue.

Eliminating this paper morass is rising to the top of the stack of fund manager concerns, according to a survey of 38 asset managers by CityIQ.

The CityIQ survey doesn't provide any answers on how fund managers can reduce operational risk but provides some insight into which areas those managers are most concerned about. The top categories: corporate actions and over-the-counter derivative transactions. Seventy percent of fund managers said they were either very or moderately concerned about how they were managing those business lines. Reducing errors increases efficiency-and reduces the amount of staff needed to administer fund operations.

One potential solution now embraced by fund managers and custodian banks: Use electronic messages to communicate information and decisions on corporate actions such as income and dividend payments as well as reorganizations. Those messages endorsed by the International Organization for Standardization can travel through the global network operated by the Society for Worldwide Interbank Financial Telecommunications in La Hulpe, Belgium.

Also causing glitches: Bad or inconsistent data on the details of the corporate action and failures to properly record a decision made by a portfolio manager into internal accounting systems.

The portfolio manager might assign the wrong corporate action to the wrong underlying account or input information incorrectly. When that happens, share positions can be incorrect and so can the net asset value of the portfolio. Software providers, such as Simcorp, have platforms which can ensure that the same information is distributed-and viewed concurrently-by front, middle and back offices.

In the case of the burgeoning $700 trillion swap market, the pending regulatory requirement for processing many trades through centralized clearinghouses is proving worrisome.

"While some of the industry's focus has been on the merits-or pitfalls-of electronic trading platforms, there is even more attention being spent on the impact on central clearing for middle and back office operations," said Geoff Harries, global head of asset servicing for DST Global Solutions, an investment management technology unit of DST Systems in Kansas City, Mo.

Among the key concerns, Harries said, is just how fund managers will link to more than one clearing agent and keep track of their initial and variation collateral requirements.

In fact, the CityIQ survey discovered that fund managers want custodian banks to help them "facilitate" the route to clearing and netting. Such facilitation means providing them with portals which would connect them to clearing agents-broker-dealers who are members of central clearinghouses.

A report commissioned by Omgeo and just published by research firm Finadium also found that fund managers were aware that central clearing will require them to accommodate daily margin calls. The best answer: either licensed software or outsourcing part or all of the collateral management process.

Omgeo says its ProtoColl software helps identify, negotiate and satisfy daily margin calls. Some of the world's largest custodian banks such as JP Morgan Chase, Bank of New York Mellon, Northern Trust and Citigroup offer some collateral management support within their middle office services units, as well.

Surprisingly, there was one concern not cited by fund managers: how proposed regulations on both sides of the Atlantic for greater disclosure of fees to investors could increase the potential for errors and incorrect payments to fund distributors.

Such fees are often calculated manually. Fund managers frequently deal with dozens of fee schedules with the numerous fund distributors they use to promote their products.

"Regulations such as Dodd-Frank in the U.S. and Retail Distribution Review in the U.K. will require fund managers and sponsors to provide a higher degree of fee transparency," explained John Bosley, chief operating officer of Bonaire Software Solutions, a Boston-based firm specializing in automated billing. "That transparency would require the fund manager and the sponsor-or a distributor such as a broker-dealer-explain the methodology and data used to calculate the fees earned to each other as well to the ultimate client-the investment fund or high-net-worth individual."

The most unexpected result of the CityIQ survey: 80% of fund managers want their custodian banks to increase their "use of standardization" and the SWIFT message formats.

Custodian banks often claim they are at the forefront of embracing SWIFT messages-which are synonymous with standardized communications. Fund managers are the ones most often labeled as laggards in adopting SWIFT message formats.

But standardization means more than just "normalizing" message formats. Custodian banks don't often disclose the exact same information to fund managers on their positions and transactions.

Having to interact with multiple custodian banks through proprietary portals can be pretty time consuming. So fund managers, according to CityIQ, ideally want to interact with all of their custodian banks through a single portal.

The disappointing finding of the CityIQ survey: Some fund managers are still sending their broker-dealers instructions on how to allocate assets via phone, fax or e-mails, rather an automated system such as those provided by Omgeo or SWIFT. Doing so increases the potential for error and the possibility that trades could fail to settle on time.