“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
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.
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The main challenges in calculating the latter
- 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
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)