Fund Services Tech And Process Risks

Many managers manage the processing and accounting work for bank debt investing internally on spreadsheets. Other fund managers use separate software packages to handle bank debt investments. Unfortunately, these software packages are not integrated with the main book of record and as a result may expose a manager to manual processes and operational risk.

Some fund managers have realized the best option is to outsource fund administration, including bank debt, to a fund administrator. If you choose to outsource your middle- and backoffice functions to an administrator, it is vital that you understand how the administrator will be accounting and valuing your bank debt. Are they processing and accounting for bank debt manually on spreadsheets? Are they using a third-party software solution? Can they provide consolidated reporting across all instrument types? It is important to understand these risks before making the decision to outsource to a third-party provider. Ensure your service provider can detail the level of automation behind the service and the quality of the software and systems.

Managers need to be aware of the complex nature of this asset class and should ensure that internal controls and procedures are in place for each stage of the trading and settlement process. Interest rate types, accrual methodologies, borrowings, repricings, paydowns, amortization payments, commitment fees, penalty fees, facility fees, letter of credit fees and credit events should be part of a specific procedure when determining the NAV.

If this level of procedure and internal control is absent, investment managers are unable to properly account for these instruments and accurately report on the results of investment activity. This can involve:

• Management of the information flow, contact of the borrower, pricing information, credit agreements, trading confirms, funding memos and agent notices need to be reviewed and processed as they represent the only source of information.

• Trade settlements – LSA and LSTA settlement protocols need to be followed as a late settlement can lead to an actual loss of income.

• Settlements of interest payments, principal reduction, credit event transactions, tracking of recurring and non-recurring fees – this will directly affect the cash management business of the client.

• Difficulty reconciling transactions – traders need to know at any point in time the holdings that are under custody.

• Lack of action in the case of a default – the client might be entitled to exercise a range of remedies against the borrower, interest rates may increase and the borrower may lose consent rights.

• Entering results into accounting systems – upcoming coupon payments, projected currency exposure and projected interest risk exposure are all areas that can be affected by incorrect accounting.

Whether you are a hedge fund, private equity fund, fund of funds or a managed account, SS&C Fund Services can tailor a solution to meet your needs. We provide independent market valuations for all asset types, improved operational efficiency, compliance with regulatory requirements, cost reduction, and better investor services using our state-of-the art applications. We are one of the largest fund administrators in the industry, yet we provide a boutique level of service to our clients, large and small alike.