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Fund Administrator Risk Mitigation: The importance of price and corporate actions validation

Vast amounts of time, money and resources have been expended related to the development and improvement of best practices for the processing of corporate actions in the asset management space. Some progress has clearly been made, however despite the above mentioned investments in this area, significant exposure and inefficiency still exists in the daily NAV calculation process.

Receipt of validated and timely pricing and corporate actions data is essential for accurate NAV production, and is a critical function given the ever compressing processing window for completion that now exists. Given the fact that prices are an intra-day moving target and time pressure increases operational and reputational risk to buy-side firms, accurate data has become a must have. A robust and standardized process is critical to enable data to get through to the back-office in order for administrators to address new compliance and regulatory requirements.

Losses incurred for incorrect processing or interpretation of a corporate action can also have a material impact on an asset manager or servicer. Validated corporate actions form a key component of the successful daily NAV calculations for fund administrators, therefore it is critical that all corporate action events are correctly detailed and attributed to a fund and that the price changes or ISIN/Sedol changes are accurately processed.

Although the main focus has been on the importance of accurate corporate actions, the link between price and event must not be underestimated, nor should the risks associated with attributable pricing errors. In the current environment of heightened sensitivity and the fierce competition that exists in all areas, risk of errors and the associated financial and reputational loss that pricing errors can create is now a much more significant concern for fund administrators.

Despite these risks and the increased pressures from regulators, getting back-office requirements on an organization's top resource/project list is often a challenge. In many instances, higher profile projects that secure revenue jump to the top of the list, rather than projects that protect the organization from significant risk. One option to justify enhancing the corporate action process is to link the project with a robust price validation solution which strengthens the overall business case and can justify the ROI.

Ask the following key questions:

- How can our organization mitigate NAV error risk in a cost effective way without extensive funding or adding significant internal resources?

- How can our organization retain control and transparency of processes but also leverage other services/solutions?

One answer may be using a managed service provider which can address the gap between maintaining the status quo internally vs. a full outsourcing of processing. A managed service provider that can provide solutions for both the daily pricing challenges, together with the more complex nature of corporate action notifications, becomes a serious option to consider, as it allows your organization to release crucial team members to concentrate on core competencies.

This ultimately allows your organization to become more flexible in its ability to deliver more refined solutions and meet the challenging demands that are being placed upon your operation. It can also have an impact on optimizing your operation, allowing your business to become more efficient at meeting your client service levels.

If a managed service solution can provide an integrated price validation and corporate action service  which can reduce operational risk, while maintaining control and transparency for the business, it can create a compelling alternative to the traditional legacy processes. When you combine that with a scalable solution that provides cost efficiencies and control of future cost increases, as well as limited internal client resources (IT and operational), the decision to engage a managed service solution can more than justify the initial investment, and should be seriously considered at any fund administrator currently providing these services

By Brent Larosa, Director Global Client Services, SunGard

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