Logistical and technical challenges for look-through reporting

By Chris Johnson, Head of Product Management, Market Data Services, HSBC Securities Services, is the Chairman of the TPA Solvency II Working Group*

Solvency II look-through reporting will affect not only insurers and asset managers, but others in the complex information chain that leads from raw data in the fund to the individual cell in the reporting template.

* TPA Solvency II Working Group, a group of fund administrators working with the Investment Management Association on Solvency II reporting.

Fund administrator’s perspective

Third Party Administrators (TPAs) provide custody and fund administration services for asset owners and managers including insurers, fund managers, pension funds and hedge funds. Most large Insurance firms have outsourced their custody and fund administration functions to TPAs although some firms continue performing those functions in-house. Solvency II has created demand to extend those TPA services to include delivery of asset data content on behalf of insurance firms to assist them in fulfilling their obligations under all three pillars of Solvency II.

As TPAs we are responding to requests from our insurance clients to deliver a comprehensive data service for Solvency II asset data. This includes look-through, i.e. the ability to identify on a line by line basis the underlying investment fund holdings, as a specific requirement. The scale, depth and turnaround times required to produce look-through data present significant logistical and technical challenges that must be resolved if the completeness, accuracy and appropriateness stipulations are to be met.

Exchange of look-through fund information, on the basis of line by line fund constituents (ISIN level), does exist on a very small scale in the industry. However, this is delivered using bespoke bi-lateral formats between firms with low volumes and with a significant time lag. At present the process is not standardised or scalable.

The industry will need to gather asset data in respect of collective investment funds, hedge funds and structured products on a large scale in a cost efficient, accurate, granular manner. The logistical challenges to this are onerous and can be explained as follows:

1. Permission from fund managers to release fund constituents: Fund managers will need to grant permission for each fund to release the constituents and weightings immediately after each period end. This will entail listing out all of the investments within the fund on a line by line basis. It includes clear identification of all investment types held within the fund in order to support the data provision for solvency calculations as well as to deliver quantitative reporting templates (QRTs). At a high level this will require asset type, ISIN/Sedol, total value and value by line.

2. Consolidating and publishing the insurers’ fund-level holdings: Insurers potentially use multiple asset managers when choosing their fund investments. This poses challenges for TPA’s to gather on a line by line basis all the asset information in respect of the holdings in these funds, to enrich it with the necessary fund administration, custody and market/reference data, and consolidate it into a usable format for the insurance company. Only by collating all of the fund constituent data, drawn from across each of the relevant TPAs, can the full picture of the look-through for all of an insurer’s investments be created and made available in a form that complies with completeness, accuracy and appropriateness.

3. Timeliness of obtaining look-through details from the asset manager:  The validation of the necessary investment information, by either the fund manager or its appointed TPA, can vary depending on the complexity of the fund, but look-through creates urgency to produce validated fund holdings very early in the monthly cycle. This poses challenges for the insurer’s TPA as there is a dependency on obtaining this information to provide it in a timely manner to the insurance company.

Costs

The TPA Solvency II Working Group believes that look-through will also generate several areas of additional cost, such as the cost of obtaining and holding additional lines of securities (including market/reference data vendor licences), the related operational overheads associated with this data and any infrastructure automation costs. In addition, there will be an interim tactical workload generated by high volumes of look-through data template exchange until such time as a standardised solution is available.

The need for a systematic solution

The complex permissioning, fund structures and linkages pose significant technical and logistical infrastructure challenges.  There is a need to pull in high volumes of detailed fund constituent information and in many cases this information will be sourced from a number of fund managers or their TPAs. This information will need to be in a format based on the exchange of standardised data templates that can then be presented to the insurer in the form of a standard QRT template as well as for pillar I SCR purposes. Any solution for look-through permissioning will need to be provided securely and accurately.

We believe the look-through process will need a systematic and sophisticated solution to avoid an overly complicated aggregation activity as well as to provide permissioning, automation, quality validation and fast turnaround that the process will necessitate.

In addition, the other Solvency II drivers of the SCR calculation under Pillar I and the ORSA under Pillar II that impact the frequency and timeliness of look-through, mean that this issue has to be addressed in a robust, business as usual manner with line by line granularity.

Fortunately several data vendors have solutions that could be adapted for this purpose but significant investment and product development will be needed almost immediately if they are to deliver on time. The TPA working group would encourage this to complete the key “missing piece” in the delivery of Solvency II data content that look-through represents. Given the impending implementation of Solvency II, we believe that a look-through solution will need to be designed and implemented urgently to meet the proposed regulatory deadline of January 2014.

* TPA Solvency II Working Group members: BNP Paribas Securities Services, BNY Mellon Asset Servicing, Citi Transaction Services, HSBC Securities Services, J.P. Morgan Worldwide Securities Services, Northern Trust and State Street.The Investment Management Association (IMA) is also a member and has participated actively in our meetings with regulators.

Source - Solvency II Wire Ltd 2012 ©. Full article:
http://solvencyiiwire.com/fund-administrators-perspective-of-look-through-reporting/43424