Increasing regulatory requirements for funds – from "nice to have" to minimum requirement for institutional investors
Data quality is a critical success factor in regulatory reporting. Fenion GmbH is a RegTech from Austria and deals exclusively with fund data and the fulfilment of regulatory reporting requirements of institutional and semi-institutional investors. Quantitative services, in particular, are playing an increasingly important role.
FondsTrends: Mr. Sernetz, please tell us a little more about what Fenion does and what the company stands for.
Nikolaus Sernetz: Fenion originally emerged in 2017 from the Financial Service Advisory department of Deloitte Austria with a dedicated focus on fund data and regulatory reporting. At that time, we realized that the data quality in the area of fund reporting is often very poor. Insurance companies, pension funds and banks in particular have increasing reporting requirements and thus increasingly individual reporting requirements that need to be met.
In the market, we see not only an ever-increasing complexity of regulatory requirements and increasing demands for quantitative services, but also consistently shortening of delivery deadlines. High data quality and fast response times therefore require highly efficient processes, which we have already implemented at Deloitte and are constantly developing.
FondsTrends: What are the specific challenges in the regulatory area, for example?
Nikolaus Sernetz: One of our core business areas is Solvency II reporting for insurance companies and product providers who have to meet reporting requirements in this segment. Fenion is today market leader in Austria when it comes to creating Solvency II TPT reporting.
One challenge is the increasingly quantitative components, such as calculating the market risk in the portfolio of insurance companies. Especially when it comes to calculating capital requirements, we see a massive need to catch up in the asset management industry, both among investment management companies as well as some service providers.
In addition to sufficient master data, a high-quality calculation requires know-how in the field of European regulation and the financial sector as well as highly efficient processes. At the moment, we see a shortening of delivery deadlines among many stakeholders in the market, which often cannot be met.
In addition, the regulatory framework is constantly evolving – for example, we see currently a new implementation of CRR II (Capital Requirements Regulation), which will come into force from June 2021.
FondsTrends: Why do product providers or insurance companies often turn to external service providers?
Nikolaus Sernetz: Employees with the requirements described above are not easy to find and are relatively expensive. With appropriate backup solutions and necessary IT implementations, the issue can quickly get out of hand. In addition, it is of course a risk factor, especially if the processes are not properly set up or have been tested over many years. In this way, we help investment management companies to create and distribute regulatory reporting formats, as well as institutional investors to obtain and process the data. Our clients not only save significant resources in the area of data and risk management, but can also focus on their core business, asset management and fund selection.
FondsTrends: Can you give us a concrete example of data management and the problems with it?
Nikolaus Sernetz: Sometimes the problem starts with the collection of the data – the process is sometimes quite time-consuming and many product providers and investment management companies are not able to deliver the data on the agreed deadline.
Once the data is received, it is often very heterogeneous in terms of quality. For example, we still see version 3 of the Solvency II Tripartite Template in Solvency II Reporting. In principle, version 5 is already the market standard today. Incomplete master data and/or incorrectly implemented data fields that do not comply with the TPT Reporting Template make it extremely difficult to calculate market risk. In some cases, we even see that a zero is entered for security master data for which no data is available. For some fields, such as Modified Duration or Coupon, this can lead to significant errors in calculating market risk.
One of the biggest issues, however, is certainly the representation of FX hedging strategies in reporting. This is sometimes implemented incorrectly by market participants, so that the client with a 100% currency hedge in their fund has a significant currency exposure according to the reporting. Of course, this not only leads to wrong reports to the regulator, but also to a significantly higher market risk or equity requirement for insurance companies.
FondsTrends: On your Linkedin profile, I saw that you are also a lecturer at the BFI University of Applied Sciences – how did that come about?
Nikolaus Sernetz: We have been working with the University of Applied Sciences BFI Vienna for quite some time. Due to our increasing focus on the insurance sector, the University of Applied Sciences approached us to ask if we could give a lecture on calculating the market risk of insurance companies. We think this is a suitable opportunity to convey practice-oriented topics, especially with regard to the increasing relevance of the topic in the market.
FondsTrends: How do you see your further development as an IT provider in the asset management market?
Nikolaus Sernetz: In terms of services and reporting quality, we are already one of the leading RegTechs in the industry. We still have a lot to do, but we are constantly expanding our product range and constantly optimizing our processes. We still see a lot of room for improvement in the asset management industry in terms of digitalization, regulation and automation.
FondsTrends: Mr. Sernetz, we thank you for the interesting interview and wish you continued success!
