Risk management and compliance management are converging for many asset managers, given the many new directives and regulatory measures.
7. Operational risk management needs to determine how regulation is affecting the “adjacent domains,” particularly outsourcing and delegation arrangements.
Managing operational risk used to be primarily about managing people, processes and systems. Given the drive toward greater degrees of complexity and expected performance, firms are encouraged to continuously check outsourcing and service level agreement (SLA) arrangements with all third parties, especially if the firm is actively managing money in emerging or frontier markets.
This is doubly important when relying upon third parties to value leveraged or non-transparent products such as interest rate swaps, credit default swaps, FX swaps/forwards, equity derivatives or inflation/climatic variables.
We reported more cases during 2011 of traditional and alternative asset managers revisiting responsibilities, liabilities and indemnifications for all arrangements, including “force majeure” clauses, as well as the price economics for all outsourcing arrangements.
UCITS firms in particular were evaluating whether there were benefits from participating within master/feeder or collective pooling arrangements, and they were checking SLAs with their custodians and transfer agents to establish who was offering what service.
This activity should include an audit of transfer agents, custodians, fund administrators and other ancillary functions.
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