THE CLIENT:
Large Investment Fund

THE USERS:
Portfolio Managers,Fund Managers

On October 28, 2020 the Securities and Exchange Commission announced an enhanced regulatory framework for derivatives use by registered investment companies, including mutual funds (other than money market funds), exchange-traded funds (ETFs) and closed-end funds, as well as business development companies where derivatives exposure is greater than 10% of net assets.

Reflecting the critical part played by derivatives in portfolio and risk management, the rule establishes a modernised, comprehensive approach to regulating the use of derivatives by funds, to meets investor protection concerns. Compliance has required significant changes in technology and governance for many funds.

Like all impacted investment firms, this large global asset manager - with over $30B in assets under management (AUM) - needed to get ready for the new SEC rule ahead of the deadline on August 19 2022. Their portfolio consists of structured products, derivatives, private equity, real estate, securitized products and leveraged loans.

Customer Needs

In order to comply with SEC 18F-4 the fund needed the ability to perform a series of defined, daily Value-at-Risk (VaR) calculations, back testing, and stress tests, that had never been a required part of their workflow previously. These calculations needed to meet specific requirements, for example having 99% confidence level, a 20-day risk horizon, and 3 years minimum of historical data.

In trying to meet these requirements internally, the firm immediately faced challenges:

• They lacked critical internal knowledge needed to effectively manage the VaR calculations
• The costs and human resources needed to meet the rules were higher than anticipated
• They were concerned that they would not be able to meet the deadline

After making the decision to invest in a risk solution, the firm began discussions with a vendor, however they immediately found significant shortcomings with the solution:

• The vendor solution lacked complete asset coverage of their exotic portfolio, meaning they could not perform the calculations needed
• The vendor solution required significant resources to manage the system day-to-day
• The vendor solution didn't have enough breadth or depth of market data to perform the required calculations

The fund's head of portfolio risk met with S&P Global Market Intelligence to discuss the Buy Side Risk solution

The Solution

The Buy Side Risk solution from S&P Global Market Intelligence instantly provided the client with a turnkey, cloud-based risk platform that does all the calculations and reporting needed for SEC 18F-4.

• Compliance: The firm successfully met the SEC Rule 18f-4 requirements by implementing a robust daily VaR and Stress Testing calculation for its complex, derivative-utilizing portfolios.
• Enhanced Risk Oversight: The Buy Side Risk solution platform enabled the client to gain deeper insights into its risk exposures, facilitating proactive risk management and informed decision-making.
• Improved Reporting: The client could generate detailed reports on VaR estimates and stress test results streamlining SEC 18F-4 reporting to regulatory bodies and internal stakeholders.
• Adaptability: The Buy Side Risk solution allowed the client to adapt quickly to changing market conditions, adjust risk models, and incorporate new regulatory guidelines seamlessly.

Key benefits:

• Risk analysis for investment management: Leverage powerful analytics to calculate market risk using Value-at-Risk (VaR) based on Monte Carlo or Historical Simulations as well as position and portfolio sensitivities, scenarios and stress tests
• Leverage data for insights: Gain unique insights by using extensive curated market and reference data. Combine this data with your own internal or third-party data to enhance risk capabilities.
• Reduce total cost of ownership: Pay only for what you use with our cloud-enabled technology. Lower the administrative burden of deploying and maintaining a risk solution without sacrificing flexibility
• Decision support tools: Decision support tools like Scenario Stress Testing, Back Testing and 'What-if' Scenarios give you an edge in portfolio construction. Run stresses based on historical data, predictive models as well as user-defined scenarios to enhance your risk management infrastructure.
• Comply with the latest regulations: Calculate mandatory risk measures such as VaR and stress tests per SEC 18F-4, UCITS, CPO-PQR, FORM-PF and AIFMD rules.

Outcomes:

By partnering with S&P Global Market Intelligence the client not only ensured compliance with SEC Rule 18f-4 but also strengthened its risk management framework.

It allowed them to achieve rapid compliance, with a powerful risk engine that performs Value at Risk (VaR) calculations using historical or Monte Carlo simulation, as well as stress testing and backtesting.

As a low-maintenance, turnkey solution created by experts in buy side risk and quantitative modelling, the system has freed up the firm's internal resources to focus on their business priorities.

Critically the Buy Side Risk Solution includes full asset class coverage so the firm can be confident it will be able to meet the SEC rules.

The collaboration empowered the firm to navigate complexities associated with derivatives, enhance risk oversight, and uphold its commitment to delivering value to clients while meeting stringent regulatory standards.

Due to the success of the initial project the client expanded their usage of the Buy Side Risk solution to calculate risk measures such as key-rate duration on their fixed income and loan portfolios.

Learn more about the Buy Side Risk solution from S&P Global Market Intelligence.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.