The secrets of navigating asset servicing risk

Here’s how to reduce risk – and lose less sleep – when navigating complex asset servicing risk

Over the years, I’ve spoken at numerous industry conferences about my passion for asset servicing. To help the audience tune in, I often work in an ice-breaker story. My favourite goes like this:

“Years ago, I  presented an overview of my management responsibilities to our Internal Audit Team. After I walked them through the scale of challenges across the spectrum of my asset servicing responsibilities, one asked how I could possibly sleep at night? My response was simple: “like a baby” (customary pause for affect) – “I’m up every two hours crying!”  

While it raises a laugh, I’m serious.  Personal experience has taught me that many industry professionals struggle with real anxiety when dealing daily with an array of unpredictable challenges. It’s hardly surprising when, as one recent article noted:

“[A]n unprecedent wave in mega mergers (>$10byn) … has pushed the 2019 expected merger value to exceed $1 trillion by Q3″

That makes 2019 a record year for merger values.  But the larger and more complex the deals, the clearer the correlation to asset servicing-related losses. I know from my own experience and conversations with peers that those losses could easily be measured in $100Ms each year.

So how can professionals successfully navigate the risks of asset servicing?

My advice is to start with the fundamentals: understand what’s really driving risk and how those drivers intertwine, compounding the overall risk picture.  Below are some key risk drivers I’ve had to handle throughout my career in asset servicing and which I strongly advise clients to consider:

  1. Lack of Standardisation

The corporate action event life cycle is prone to inconsistencies.  There are differences in how investment bankers structure deals; in how event information is disseminated, captured and pushed downstream to broker dealers and their clients; in deadlines and payment dates across custodians and depositories; and in the impact on the operations teams.

The good news is that, while there’s still a long runway ahead for improvement, there has been some progress towards a more harmonized approach. For example, general acceptance of SWIFT messaging as the basis for communicating across the details of the asset servicing life cycle.  Similarly, DTCC’s efforts to move from their mainframe legacy corporate action infrastructure and adopt ISO 20022 standards for communicating corporate action event details have the added benefit of ensuring that North American-centric DTCC participants are more engaged in global SWIFT standards discussions than ever before. 

Even so, deeming a standard messaging format is just the start.  The broader challenge is the large disparity between how corporate action events are announced, structured and / or facilitated across global markets which, at times, makes even a standard messaging format a challenge in and of itself.  In my own most recent management role, my Global Announcement Team had over 160 corporate action event templates, with thousands of attributes that all required interpretation, as one given custodian or depository could simply opt to use a specific field in the message differently from another.

2. Increased Client Demand

Increased client demand is regularly noted as a key driver to many asset servicing challenges, as well as being the driver for technology innovations.  When I first set out on my journey within corporate actions, the day to day goal was simply to ensure that we had the most accurate payment information in our platform on pay-date.  Now, the implementation of new accounting standards such as Basel II, coupled with more complex P&L based booking models across equity, derivative and / or swap-related markets means that the new standard expectation is for all corporate action event details to be confirmed within the firm’s systems by ex-date or effective date minus 1.

When taken in context with broader industry standardisation, this client-driven standard poses challenges for firms to optimise their solutions and effectively adds to their overall risk. 

3. Technology

The lack of announcement standardisation is further complicated by the added complexity of today’s corporate action events. When coupled with the increase in global M&A volumes, these events stretch many firms’ technology infrastructure to breaking point.

At Sionic, we’ve seen an increase in technology investment in the asset servicing space across numerous clients in the last few years.  While the investment drivers may vary from moving away from expensive legacy mainframe constructs to exploring the cloud for a more flexible robust processing environment, they share a common theme: risk reduction.

The metric I often use when assessing teams’ ability to mitigate risk is ‘touches.’  How many times is a single corporate action event touched by a team member?  Less touch equals less risk. But the key to achieving the less touch objective is understanding the drivers behind the exceptions that require a ‘touch’ and being able to delve into the data points to optimise the STP framework for the platform being developed.

4. Risk Reporting Frameworks

Oddly, the actual risk framework used to oversee the asset servicing process can itself be a real driver of risk.  Far too often when I review a loss caused by an asset servicing-related issue, I discover an incomplete risk reporting framework or a gap no-one spotted. Having the right balance of post-payment reconciliation reporting versus the more front-footed predictive event reporting is essential to any firm’s ability to mitigate corporate action losses.

Mitigating risk within asset servicing is not easy. Frankly, without significant strides within global markets to harmonise the asset servicing event life cycle, managing asset servicing risk is something we will all need to do for the foreseeable future. Having the right team on your side will make a material difference.  Sionic brings a wealth of asset servicing experience to every engagement we enter.  Our ability to understand market nuances and understand issues that arise daily are invaluable to any firm focused on navigating asset servicing-related risk.  And you might even get some rest.

Meet the expert

Joseph Denci

Managing partner

I have an internationally-respected track record of leading financial services firms through significant organisational change.