THE ROUNDTABLE PANEL
Bernard Hanratty, Managing Director, Head of Fund Services EMEA, Global Transaction Services, Citi 
Russell Hart, COO, PCE Investors 
Sunil Chadda, Principal Consultant, Carne Global Financial Services 
David Wright, Investment Administration Solutions, DST International
Moderator:
Peter Guest, Transaction Services Writer, FT Mandate
Peter Guest: Welcome to the FT Mandate fund administration roundtable. This has been a challenging year so far, and the asset management community continues to innovate to keep ahead. There are some new challenges, and some old ones that don’t seem to go away. Bernard, what do you see as the main challenges that your clients face?
Bernard Hanratty: Performance continues to be the primary objective of every asset manager. As such, we are seeing the blurring of hedge and traditional long strategies. This change has had a significant impact on the infrastructure investment managers have in place to support those diverging strategies.
The volumes of OTCs [over-the-counter derivatives] generated over the last 18-24 months, particularly in the traditional long space, have created significant issues, both for the industry and the ability of the managers to cope with it. Much of the burden is being passed on to administrators who are tasked with the provision of systems, expertise and control. However, the administrators have also had to catch up, in terms of the development of systems, transaction volumes, procedures and controls.
The endless search for alpha is the most significant challenge. It is interesting that whilst this is very much the view of asset managers, some institutional clients are actually comfortable with stability and a little alpha thrown in. A recent report by Create Research, sponsored by Citi, found a disconnection between the buyer and the seller of the services. Nonetheless, there are strategies, such as OTC, that put significant stress on everyone, as we try to evolve the product profile.
Peter Guest: Some of these issues have been around for a while though. It strikes me that there has not been any tangible progress in some of these issues. The OTC side is not new. It has not arrived in the last 18 months.
Bernard Hanratty: It is not new from a market trading perspective, but large insurance companies, for example, had limited exposure to OTCs as recently as two years ago. This is no longer the case. If you look at industry volumes generally, we see relatively organic growth. There has, however, been significant growth in other sectors that were designed and structured for a very different product profile.
Peter Guest: So is there still a technical challenge to overcome, or do you think it is now a question of scale?
Bernard Hanratty: I do not think we are there yet regarding the technical challenge. We have seen good infrastructure coming in for automated confirmation processes, but they are around the vanilla products and not around the complex OTCs. This is where the risk is.
Russell Hart:This has only really been done well with the interest rate swaps and CDS [credit default swaps]. As soon as you look to do something slightly different, there is nothing to support it. It is a case of resorting to sending faxes or PDFs of all your confirmations to the administrators so that they can handle them.
Peter Guest: That is a big issue. Who is the burden to fix it on? There seems to be a shifting of blame between the different service providers and clients.
David Wright: The fund managers are always leading the way. The administrators are trying to catch up with what they are doing. We are trying to catch up with what the administrators are doing. Progress has been made over the last few years. Credit default swaps were an exotic instrument a few years ago. We would have talked about that as an OTC, exploring how we would process that, and so on.
Many of those problems have now been solved, but in solving those problems, people have moved on and there are now other OTCs, more sophisticated one offs, and so on. We are now trying to solve those. We are making progress, but those up in front keep moving ahead to. We are always playing a chasing game.
Sunil Chadda: I agree with that. OTC derivatives still have structural issues, operationally and in terms of the systems. The asset class we are seeing coming in
now is that of term loans. There are a number of hedge funds out there wanting to trade term loans, ideally via a prime brokerage SPV [special purpose vehicle] type of product. That takes the risk away, but there are still other hedge funds out there that are trading term loans directly.
If you look at the bank loans market, whether it is term loans or revolving loans, there is a complete lack of structure. It is like a sell-side ‘Wild West.’ Trades do not settle on time. There is a lack of market convention. This is the next challenge.
