Risk Revolution and the challenge facing Asset Managers
There is no doubt that the asset management industry in Asia is going through one of its most testing times. Greater scrutiny from investors on the non-investment aspects of managers and a plethora of regulation will force managers to implement more rigorous practices in the future. Many managers have and will look towards their asset servicing providers to address the new market challenges. Francis Braeckevelt* reports on an industry in transition.
The transformational changes we witnessed during recent years have both changed the financial landscape and created opportunities and challenges for managers and service providers. Regulators responsible for the financial sector globally came together to further regulate and streamline the current operating environment through increased and improved governance, transparency and accountability practices whereas market participants rediscovered the fundamental risk – reward theorem. Especially when looking at investment opportunities in emerging markets and exploring new products and services across the investment life cycle, managers have adopted new and improved approaches to assessing and mitigating counterparty, market and business risk.
Looking at Asia specifically, today, most analysts refer to the region as a global engine of growth, expected to generate rapid progress in the financial and capital markets. Not only are global financial institutions expanding their distribution channels in Asia to leverage the accumulated wealth of an increasingly affluent Asian population, domestic asset management companies are also looking at product innovation and local governments at market liberalisation through investor education or regulatory reform programmes.
Trying to fully grasp the mechanics and the growth drivers underpinning the many macro and micro economic developments in Asia can be both daunting and fascinating as we are talking about a patchwork of countries that make up a well diversified region with markets at different stages of development and rapidly emerging client segments. Asset service providers, in response, need to focus on capturing growth in the underlying countries and segments through bespoke service models and client solutions rather than rely solely on a holistic, regional approach. Where a certain degree of standardisation is essential to build and maintain efficient processes, the true secret of a successful franchise lies in its ability to respond to the various customisation requirements that remain so deeply engrained in Asia’s DNA.
Given the service provider’s unique position as a central data repository in the post execution trade life cycle, managers are looking at their providers to manage their increasingly complex matrix of operational and information needs. Where in the past, when things went well, managers were primarily focused on their investment strategies and often neglected the post execution processes, in today’s environment, the service provider’s role has become more and more multifaceted with managers relying heavily on robust and modular monitoring and reporting tools, transforming the investor – provider relationships in true partnerships.
Where the current progress would not have been possible without the recent technology advances, implementing proper risk controls and corporate governance structures have proven to be equally important to maintain and develop a robust operating environment. Not only are managers cautiously looking at investment opportunities in areas like ETF processing, Sharia’ah or socially responsible compliant investment strategies or derivatives, they are also looking at their service providers to provide them with more granular, faster and better information and data to better understand their current and expected risks and exposures.
In addition to the investment performance and risk analytics tools, for example attribution analysis or investment guideline reporting tools, managers and servicers are also looking at better understanding the component parts of the various types of risk inherent in asset servicing in order to address those more accurately.
And as the front office processes and strategies continue to become more sophisticated, many managers are realising that they may not be well equipped to handle the post-trade activities in-house, that they do not have the data management and reporting capabilities that are central to the daily activity or that they are not able to absorb the cost of upgrading and maintaining in-house solutions. As a result, they are turning to their administrators for the solutions.
Unfortunately, there are no magic, ready-made mitigation solutions and providers address this by leveraging client service excellence programmes, state of the art technology, enhanced reporting, information and communication tools and by applying stringent risk management policies and internal audit controls. Tools which, to be truly effective, need to be fully engrained in the organisation’s core activity and adopted by the entire company, from senior management to the various operational units.
In order to deal effectively with the changed attitude towards risk, with ongoing market developments and customisation requirements of Asian investors as well as the need to train and educate market participants, understanding the market and client specific needs as well as the regulatory market framework is essential in tailoring effective client solutions geared towards the current and anticipated market, segment and regulatory trends.
Needless to say that the recent drive of market authorities and regulators to implement additional rules, regulations or market standards to address market and investor concerns has significantly impacted the rate at which new investment or servicing opportunities arise as well as further defined the scope of the proposed client solutions.
So, in short, while the overall business and regulatory environments have provided more than their fair share of challenges to the funds industry over the last two years, the market response has been proactive with many managers not waiting for the ink to dry on the rafts of proposed regulation and already turning to their asset servicing providers, seeking a deeper service range across the full middle and back-office spectrum. Providers up to now have been more than keen to oblige and have wasted no time in expanding and enhancing their array of products.
* Francis Braeckevelt is Head of Planning & Development – Asia-Pacific at BNY Mellon Asset Servicing
For more information, please contact
Head of Planning & Development, Asia-Pacific
BNY Mellon Asset Servicing
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