Standard & Poor’s is exploring the possibility of creating pre-packaged reference data solutions for investment managers seeking cost effective means of complying with the risk and regulatory demands generated by their greater use of alternative asset classes.
This follows research carried out by S&P – which has traditionally provided data to the sell side of the market – into the state of risk monitoring capabilities on the buy side. The results of its survey of compliance heads at 319 asset management houses show that just two per cent of the European firms questioned have a comprehensive risk monitoring framework in place today. S&P defines a risk monitoring framework as comprising a compliance tool, a risk tool and a data component.
Mark Pearce, the associate director at S&P who led the research, says: “The front offices of asset managers are investing more and more in derivatives and alternative asset classes in pursuit of alpha, and the supporting functions need to catch up.” The problem is that the high cost of either building or buying a compre-hensive risk monitoring framework is effectively pricing smaller players out of the market. “This presents the reg-ulators with a problem, because they are trying to apply regulations across the market, covering all asset managers regardless of size, but not all firms can afford to comply,” Pearce says.
Through follow-up meetings with 10 of the asset managers surveyed, S&P sought to establish the main reference data issues faced by firms who are interested in risk monitoring and, taking advantage of regulation like UCITS III, are making greater use of derivatives not just for hedging but as an investment tool. One is securities identification, says S&P director Darren Purcell, “which no longer just means a code identifying one security, but the whole identification of the complete instrument, with the security linked to the issuer and to the listing”.
Another is concentration limits and counterparty risk – and it is this aspect of the asset managers’ data challenge that has caused S&P to re-examine its own products and establish whether they currently meet the needs of the buy side. “UCITS rules require asset managers to take in information about all the securities in the family tree of the securities they hold, in order to calculate the concentration of an issuer or group in the fund,” Purcell says. “Having to take all that data by direct delivery will price a number of asset managers out of the market, if traditional pricing models are applied. Taking every security of every issue in the whole Ford family tree, for example, would get very expensive.
“We are looking to establish where it makes sense for us to deliver data directly, and where it might make sense for us to pre-package the data into a summary and charge differently for that, to make it affordable for small and medium sized investment managers.”
S&P will take some time to analyse the information it has gathered in more detail, and work out how it might adjust its current products to better meet the needs of this section of the buy side, he adds.