“Increased global regulatory pressure is set to provide the main challenge to fund administrators over the next 12 months to 18 months. This is manifesting itself as an increase in capital requirements on depositaries of non-Undertakings for Collective Investments in Transferable Securities (UCITS) funds stemming from the ‘strict liability’ clause in the draft Alternative Investment Fund Managers (AIFM) directive in Europe. Pressure is also building from proposals for more transparency and independence in the valuation process.
These present an opportunity for administrators to increase the scope of work that they perform for non-UCITS funds (or their managers) that are subject to the AIFM Directive as well as driving more outsourcing of the valuations process to the market.
Those administrators with the ‘best fit’ business model for the new world order and the ability to outsource such processes will be the winners.
At a more detailed level, we expect the industry to continue to focus on independent pricing and valuation of assets held in funds.
The main challenges in calculating the latter are:
- Investor-led pressure to increase the frequency of valuations; and
- The trend in the traditional space toward more complex, alternative investments on a daily pricing model.
In both instances, the manual effort required to price illiquid instruments more frequently is not priced into the operating models of many industry players. There is much talk in the securities services industry about fairer compensation for work done.
The industry generally is not perceived as having a transparent pricing model as this would require service providers to move away from low price, asset-gathering deals.
The increasing pressure for independent validation of pricing could manifest itself in one of two ways. One possibility is that independent administrators, those without custody, banking or prime brokerage businesses, could benefit from that independence and acquire business that is currently undertaken either in-house or is with a nonspecialist competitor.
Another possibility is that business could gravitate to those administrators that have the balance sheet to stand behind the pricing of the funds that they administer. HSBC Securities Services (HSS) thinks that the first possibility is probably only viable in the short-term. In the medium- or long-term, the lack of balance sheet strength may eventually exclude niche specialist administrators from business.
Technology should continue to be the key driver for clients. In the next 12 months to 24 months expect more emphasis on frequency of valuation as institutional investors and regulators push for more transparency into their investments. Quality and frequency of pricing delivery and more focus on the robustness of service provider technology, including disaster recovery, will also be important.
Over the medium to long term, custody and administration will become bundled services to the extent that new laws and regulations permit, since it will be difficult for any supplier to fully discharge its fiduciary responsibilities without performing both services. In particular, custody is important to service providers to enable them to provide credit/leverage. Administration, on the other hand, is critical to appreciate the total picture of a fund in particular circumstances and to detect early warning signs of any problems.
The large, truly global fund administrators that have strong balance sheets, a strong global footprint and the ability to provide multiple services will win the fund administration game in the medium- to long-term.”
Paul Keltie is head of fund administration services, HSBC Securities Services (Guernsey)