Asset managers must devote greater attention to operational risks, particularly around reconciliation, so as to reduce the likelihood of losses and satisfy investors and regulators that internal processes are up to institutional standards.
A number of managers continue to rely on manual reconciliation processes such as using Excel spread-sheets, which can expose firms to serious operational risks and reputational or regulatory damage should errors occur.
There is also a significant amount of data involved in reconciliations and a failure to manage it accordingly through seamless processes can result in major operational risks. Regulators and stakeholders are becoming more cognizant of operational risks and are demanding managers implement rigorous controls to ensure client assets are fully protected.
A failure by a manager to answer a straightforward question from an investor, stakeholder or regulator around – for example – whether the data traders see in order management is what is held at the bank, could lead to embarrassment, reputational damage and potential financial losses similar to those that could be incurred through strategic risks, such as credit or market risk. Furthermore, such shortcomings would likely be a red flag for any operational due diligence professional responsible for selecting an institutional manager.
Automating these reconciliation processes using products such as SS&C’s Recon service allows firms to reconcile complex accounts and their activities more frequently and accurately through audit tracking. These products/services enable firms to reconcile on a daily basis instead of weekly thereby allowing managers to catch breaks sooner and remedy high-impact reconciliation issues.
By enhancing reconciliation processes, managers can reduce the risk of error, something which has a huge impact on productivity as it requires key personnel to remedy mistakes distracting them from their core focuses.
Automation through SS&C’s Recon also helps firms comply with regulatory requirements around audit. A number of SS&C clients, for example, effortlessly adhere to SOC1 and 2 Service Control standards during regulatory audits. Upgrading processes almost fully diminishes operational risk because of the reduced human interaction during reconciliations.
Recon, for example, is expansive and assists firms with transaction matching, security identifier comparisons, exceptions management tracking, reconciling internal sub-systems and cash proof and cash roll. Using outsourced providers can also help managers lower their operational costs and refocus their efforts on delivering alpha for clients and raising meaningful capital from prospective investors.
Improving reconciliation processes is just one area where managers have made enhancements to their operations. Many firms have recognised that poor management of operational risk helped contribute to the financial crisis and subsequent investor withdrawals and redemptions.
As such, regulators, investors and stakeholders have taken a growing interest in how firms manage their operations. Demonstrating rigorous operational procedures and best market practices, particularly around reconciliations and exception management – which is often best outsourced to a third party - is essential if firms are to attract investor attention and ensure their businesses run smoothly in these volatile markets.
By Alan Goddard, Director, Product Management, SS&C Technologies