simcorp journal credit+ratings apr09
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SimCorp JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT April 2009 7
In November 2008 Fitch Ratings
revised the London-based assetmanagers rating from M2 to M2+.
It noted, The rating also factors in
the extent of Schroders research resources
and the solid risk management
framework. The addition of the +
modifier emphasises strength in the
companys investment infrastructure and
the technological platform with notable
progress being made in data management
and integration (...)2.
Other recent upgrades where Fitch made
specific reference to technology as a
determining factor included Groupama
Asset Management, RFM Investment
Management, Rothschild & Cie Gestion
and Robeco.
THE OXYGEN OF ASSET
MANAGEMENT
That Fitch should include technology in
its set of five rating categories3 - company
& staffing, risk management & controls,
portfolio management, investment
administration and technology - is notaltogether surprising. As Andrew Cox,
partner, and head of regulatory capital at
actuaries and consultants Lane Clark &
Peacock explains, Data and informationis the oxygen of any kind of insurance or
asset management business. If you dont
know what business youre running then
how can you expect to run it well or to
react to changing environments and
situations? The ability to know what your
business is and to know what your
business is doing quickly is, we think,
vital. And that in the end comes down to
IT systems, most of all because there are
vast amounts of
information that any
asset manager will
need about all the
holdings of differentindividuals, contracts
that theyve got in
place etc. So the
ability to be able to
turn that vast amount
of very detailed
information into
usable and useful
summaries in a
matter of days rather
than weeks is pretty
important.
Moodys Investors
Service takes this
into account when evaluating and
assigning its Investor Manager Quality
ratings. Moodys believes, it explains,
that the successful operation of an
investment management firm relies also
on the ability of the firm to set up an
appropriate investment infrastructure,
including the use of real-time portfolio
management systems and various external
data service providers to deliver targeted
levels of portfolio management,
accounting, shareholder services, and
legal/control functions. In this area, face-
to-face discussions are reinforced by on-site reviews.
It is also recognised that the failure of IT
operations could threaten an investmentmanagement companys ability to manage
and monitor efficiently its offerings and
provide adequate client services. For this
reason, while stopping short of an
assessment of enterprise-wide operations
risk, we review the content and frequency
of back-up systems as well as the tests of
reliability of the key information feeds.4
A spokesman for Standard & Poors
notes that, For financial institutions
ratings, technology is not a major area of
focus [for us]. Rather, we are more
interested in the broader enterprise risk
management of the firm (risk governance,credit risk etc.) and the degree to which
senior management can answer our
questions and present credible, timely
management reports. Within this, we do
also focus upon operational risk, which is
important to asset managers, for example
disaster recovery, how management
monitor operational risk etc.
BASEL II / SOLVENCY II
The rating agencies then do not offer
themselves as detailed analysts of data
systems and technology platforms. It is
quite clear however that they do attach a
significant degree of importance to the
technological underpinning of an asset
management or fund management
business when apportioning ratings.
With hindsight it was inevitable that ITs
role in risk management and capital
adequacy would become more important,
even before the financial crisis beginning
with the US sub-prime fiasco.
Information and the efficiency of systems
lie just below the surface of the criteria of
Basel II for non-life business and
Solvency II for insurance and asset
managers with a life insurance aspect to
them. There is a strong emphasis on riskmanagement and controls and on
operational risk in Basel Pillar 1. And
e stakes howeverhave become considerably
heightened in light ofthe recent volatility innancial markets.
# Credit ratings:IT in the spotlight
When Schroders Investment Management received a rating upgrade, the strengthof its technology platform was a key factor in the rating agencys opinion.by Richard Willsher
Schroders has achieved key milestones in its Londonoperations with respect to its technological platform
following implementation of SimCorp Dimension as themain accounting and repository tool. Risk managementroutines have been responsive to the volatile marketenvironment and included heightened surveillance ofcertain risks.
Reviewing and Rating Asset Managers, Fitch Ratingsreport, 29th May 2007.
Approach to Evaluating and Assigning InvestorManager Quality Ratings to Asset ManagementCompanies, Moodys Investor Service, 31st August 2005.
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April 2009 JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT SimCorp8
quality information and robustness of
systems falls within the view of regulatory
oversight in Pillar 2.
The stakes however have become
considerably heightened in light of the
recent volatility in financial markets.
Anything other than a rapid response to
marking assets to market and speedy
quantifying of positions poses a
reputational risk to an institution.
Both Basel II and Solvency II are, in the
end, about risk management, says
Andrew Cox, and the first step to
managing risk is identifying risk. The
only way you do so is by knowing what
your business is doing, what risks its
running and what its exposures are and
this derives from the IT system. There at
the heart of it a good data system is a pre-
requisite for good risk management. He
goes on to say that the UKs Financial
Services Authority is particularly keen to
focus upon the integrity of data.
From my personal experience in working
with clients to help them with both
regulatory capital and Solvency II,
concludes Cox worryingly, it is
remarkable how difficult it is to get
information or even to find someone who
actually understands what the information
means. There is a lot of room for
improvement. Different companies are atdifferent levels. Above all people must
not think that this is a solved problem.
With the current pressure from regulators,
pressure from markets and pressure on
the models applied by rating agencies in
arriving at their ratings, it looks inevitable
that IT will be further thrust into the
spotlight. Ratings criteria will have to
place increased emphasis on technology,
even more than they currently do and
anything less will again draw criticism of
the rating agencies themselves. In the
rating process there will be winners and
losers. Ratings will go up or down
depending on how flexible, scalable,
robust and quick their systems are in the
way they respond to the stresses placed on
their asset managers businesses.
Richard Willsher is a London-based
financial journalist and former investment
banker.
Credit ratings:IT in the spotlight
...it is remarkable how difficult it isto get information or even to findsomeone who actually understands
what the information means.