Opp Risks Chapter4

7/28/2019 Opp Risks Chapter4

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Cht 4 Dd Bt Inormation Hand-ofsTop 10 operaTional risks A Survival Guide or Investment Management Firms

Timing can also be a challenge. In many instances, inormation is only sent rom one application to another on

a nightly batch basis. Yet as settlement cycles shorten, such a batch-based approach may not be sufciently

requent or communicating critical inormation between systems. Other timing challenges arise when interaces

ail to consider the impacts o backdated activity. Global investment managers are oten plagued with timing

issues because there is never an end to the day. Inormation must be handed o seamlessly rom one ofce

and applicationto another in an endless cycle, leaving no time or the traditional overnight cycle.

Many interaces suer rom more than one o these problems, and operational risk increases geometrically asmore interaces are involved. Indeed, the inadequacy o system interaces is oten a key driver in the decision to

consider outsourcing. Many investment management rms choose outsourcing because it is more cost-eective

and less complex than addressing all the known and unknown issues with their internal systems.

To be proactive: Develop a thorough system diagram that includes every application in use and identies

the interaces between them.

Diagram workow to determine where hand-ofs occur. A swim-lane diagram that depictseach system in its own lane can be particularly helpul in identiying where inormation hand-

os occur. Such a diagram can also capture hand-os between people and systems (again,

think o entering data rom paper tickets), as well as those between teams or departments,

between one rm and another (such as receiving execution details rom a counterparty and

sending back trade allocation inormation), between two or more systems, and between

the investment manager and its clients (such as client reports or subscription and

redemption activity).

Portfolio

Manager

CreateOrderTicket

Fax BankAuthorization

Letter

AllocateExecuted

Trade

UpdateTicket

UpdatePosition

SettleTrade

Issue

Confrmation(s)

UpdateTicketTr

ader

Yes

No

Custodian

TradeSupport

InvAccting

System

Cou

nterparty

Execute

Order

Place Orderwith

Counterparty

Enter Trade(s) intoInvestment

Accounting System

Ticket MatchesConfrm?

UpdatePosition

Swim-lane diagram


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Cht 4 Dd Bt Inormation Hand-ofsTop 10 operaTional risks A Survival Guide or Investment Management Firms

Examine each identied hand-of in detail. Once an exchange has been captured, consider

how oten the hand-o occurs, the kind o inormation transerred, the timing around the

hand-o, and what might go wrong with it. We nd it helpul to look at available metrics,

procedural documentation, data requirements, and error logs to evaluate the scope, nature

and repercussions o potential operational mishaps.

Develop a comprehensive inventory o trouble spots. For example, i we again think in terms

o the old paper-ticket systems, a ticket could be lost or entered twice. It might be illegible,

or contain bad inormation in one or more elds, or have been submitted ater the data entry

team has gone home or the night. It is also possible that the securityor the counterparty,

the currency, or even the portoliohas not yet been set up, or set up incorrectly, in the

investment accounting system. With an inventory o what might go wrong, rms can assess

each one, estimating the likelihood that problems will occur and the damage they might cause.

Build workows, processes and escalation protocols to mitigate the risks. In some cases,

a quick x may be sucient to solve the issue. I, or example, a security or currency has not

been properly set up, some rms may be able to x that on the spot. In other organizations,

however, the problem and its solution may not be so simple. For example, i trade entry clerks

are not authorized or trained in new security or counterparty set-up, a urther hand-o is

required between trade entry and the security/counterparty maintenance group. This new

hand-o needs its own examination o risks and how to mitigate them.

Examine hand-ofs to and rom outsourcing providers, and expect that those providers

have done the same thing. Firms such as SEI use automated workfow tools where possible

to ensure better tracking, increased consistency, and aster exception processing. Where

appropriate, each hand-o should be covered by a service-level agreement with deadlines,

quality expectations and metrics that provide benchmarks or evaluating the perormance o

both the provider and the investment manager.

Dont orget to consider inormation provided by clients. Even the most sophisticated

institutional clients sometimes ail to notiy managers o contributions or withdrawals in

separate accounts, or example. Such ailures create needless reconciliation work or harried

operations sta and can lead to distorted or misattributed returns. A portolio manager is more

likely to orgive the client than the operations group when his/her perormance is aected

because the client neglected to inorm the rm o a cash fow.

Once investment managers have a complete inventory o where their

operational processes might go wrong, they can take systematic steps

to reduce or eliminate their risks.

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This inormation is provided or educational purposes only and is not intended to provide legal or investment advice. SEI does not claim

responsibility or the accuracy or reliability o the data provided.

Inormation provided in the U.S. by SEI Global Services, Inc. Beyond the U.S., this material is provided by SEI Investments - Global Fund Services

Limited (Reg. in Dublin No. 242309), SEI Investments Trustee & Custodial Services (Ireland) Limited (Reg. in Dublin No. 315393), and their aliates,

which are all wholly owned subsidiaries o SEI Investments Company. SEI Investments - Global Fund Services Limited and SEI Investments

Trustee & Custodial Services (Ireland) Limited (Styne House, Upper Hatch Street, Dublin 2, Ireland) are authorised by the Central Bank o Ireland

under the Investment Intermediaries Act 1995. This material is not directed to any persons where (by reason o that persons nationality, residence

or otherwise) the publication or availability o this material is prohibited. Persons in respect o whom such prohibitions apply must not rely on this

inormation in any respect whatsoever.

2012 SEI 120710 (

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Opp Risks Chapter4