Confluence Connect Magazine: Issue 2

CONNECT ISSUE 2

Confluence Connect / Issue 2

Contents:

Reflect and assess!

4 More Than Compliance: Setting the Scene for the Next Phase of RegTech

Over the past 18 months we have been through some of the craziest times the world and the industry have ever seen – yet we survived, and dare I say, we even thrived.

6 Why and How Investment Management Performance Teams are Looking for a Way Forward 7 The Front, Middle, and Back Office aren’t What They Used to Be 8 How Asset Managers Can Thrive in an ESG-Focused World

Somehow, without face-to-face meetings and gatherings, such as conferences or other industry events, and with a ridiculous amount of video calls, we kept the global financial markets afloat and are finally seeing the light at the end of this pandemic tunnel.

So, what did you learn? Could you have ever imagined that the office may not be as critical as we all once thought? Could you have ever envisioned making so much progress and meeting so many of your goals without in-person interaction for more than a year? We have all learned so much about ourselves, our peers, and the industry during these trying times, but one thing seems clear – the pendulum is ready to swing back to some level of normalcy.

Along with the “new normal” comes some of the old, everyday challenges that we’ve faced for years and have been working to solve. Back at the forefront of everything we do is the need for technology and innovation. As we begin to see the pandemic in our rearview mirror, we still see some of the same old requirements on the road ahead - reducing costs and operational risks, improving data quality, and delivering compelling and worthwhile products to our customers.

At Confluence, these are the very things that we have been focused on for 30 years – through economic turmoil, global sociopolitical events and now a pandemic. Your challenges are our challenges, and as partners we will continue to help you meet the challenges of the moment.

We hope you enjoy this edition of Confluence Connect magazine.

Gary A Casagrande Vice President of Global Market Strategy

10 Here’s How Asset Managers Can Unlock the Value in ESG 11 Adapting to SEC Rule 18f-4: What You Need to Know 12 Three Critical Questions You Should Be Asking About the SEC’s Big Changes for Shareholder Reporting 14 Adapting Smoothly to SEC Rule 18f-4 16 Navigating Today’s Regulatory Landscape 17 Confluence Webinars 18 The Next Phase of RegTech: Automation, Consistency and More 19 We Are Confluence

Confluence Article

More Than Compliance: Setting the Scene for the Next Phase of RegTech As the RegTech space continues to mature, focus is shifting from the what to the how – that is, from simply being compliant to identifying how asset managers and service providers can leverage technology to refine existing compliance and reporting procedures and execute them with efficiency, precision and cost-effectiveness.

Download your free eGuide to learn: • What the next phase of regulatory technology will offer asset managers and service providers • Why automation and consistency will play a crucial role in responding to future regulations and regulatory changes • How Confluence’s RegTech solutions are built to minimize human error and respond to regulatory change

Looking Ahead Across the globe, regulators are checking work more closely and asking asset managers to amend their reports with additional clarifying information. And why wouldn’t they? Beyond safeguarding investors, this data is valuable for imparting insights and informing rulemaking.

This is another way that the new wave of requirements, while burdensome at times, is making the industry stronger – but this higher level of scrutiny also means reporting errors are more likely to negatively impact an organization than ever before.

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Confluence Blog

Confluence Blog

Why and How Investment Management Performance Teams are Looking for a Way Forward

The Front, Middle, and Back Office aren’t What They Used to Be

In July 2020 we participated in a Financial Technologies Forum (FTF) webinar in called “Performance Teams Under Pressure”, where fund and asset management professionals and service providers were asked about the key issues around the data tools and technology they use to gauge performance and report it to their clients.

Performance has always been the industry’s yardstick for measuring investment effectiveness; whether for a single security, a portfolio or for a firm-wide look, asset managers need to capture the right data and then accurately calculate, analyze and report on their performance and risk exposure.

The answers to those poll questions provide a window into the current challenges and concerns, and suggest a roadmap for a way forward as the industry looks to improve how it measures and reports in a constantly-changing regulatory landscape.

What is the key operational challenge that performance teams need to navigate in the current market conditions?

The size, scope and complexity of the performance measurement task has grown exponentially since the financial crisis of 2007-2008, and it is paramount that investment managers are able to react with the right tools and technology. But to do that, they must first correctly identify the challenges they face.

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The start of a new year is always an exciting time to look ahead at what can be and to reflect on what has been. Sometimes we are compelled to look beyond the year coming up and instead reflect on more than the year past.

These days, I find myself reflecting on the progress that the global investment management industry has made over the last 25+ years, with making viable investments available to everyday people to help them grow their assets and save for the future.

That timeframe of reflection comes easy to me as over 26 years ago I started learning what this industry was all about.

Starting at State Street doing fund accounting and custody work in the mid-1990s, into the 2000 teens running large fund administration teams and now, at Confluence, focusing across the entire front, middle, and back office spectrum, I have been lucky enough to see a LOT. Upon reflecting, it is interesting to think about how different things are today while at the same time how little has changed and what is happening today to transform the industry as a whole.

I don’t think that I talk to people in the front, middle, and back office today more just because I have more confidence than I did as a 20 something-year-old, or more experience, or that I work at a company that is interested in solving problems across the investment lifecycle.

No, I think it’s because the front, middle, and back office continue to undergo massive changes in the way that they interact, communicate and work together.

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Confluence Article

How Asset Managers Can Thrive in an ESG-Focused World Solving the challenges of systematic integration of ESG metrics into the investment process

Download your free eGuide to learn: • How buy-side firms are building and using ESG data • How ESG metrics can be embedded into the allocation process • How Confluence’s Delta ESG Hub helps firms avoid disruption and inefficiency throughout the ESG integration process

For the past decade, the inclusion of Environmental, Social and Corporate Governance (ESG) criteria has become a leading trend in the financial industry, deeply changing the stock picking and allocation process of asset managers.

What is the score?

ESG scores must encapsulate enough information about company fundamentals from an environmental, social and governance perspective for the portfolio manager to define investment preferences and actions: buy, sell or hold. But what are the complexities that arise in embedding these metrics into the investment process?

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Confluence Blog

Confluence Blog

Here’s How Asset Managers Can Unlock the Value in ESG

Adapting to SEC Rule 18f-4: What You Need to Know

For the past decade, Environmental, Social and Corporate Governance (ESG) instruments have become an increasingly popular choice for socially conscious investors and buy-side firms. These investors want to ensure that the companies and other entities they fund share their vision for the future of society. Instead of value investors, think values investors. This has necessitated a marked shift for the buy-side, which requires not just a high volume of relevant data to meet this demand, but also a strategy for making sense of it all.

A derivative is a financial instrument whose price is based entirely on something else. And in the separation between price and the underlying asset, things can get complicated and risky. That’s why – for as long as derivatives have existed – those in charge have tried to control their use with laws and regulations. The electronification of trading in the past couple of decades has revolutionized the industry, leaving regulators in a constant struggle to keep up. To modernize the regulatory framework covering derivatives, and to address how both derivatives themselves – and the risks they pose to investors – have changed, the SEC has fundamentally changed the rules.

In our latest article, “How Asset Managers Can Thrive in an ESG-Focused World,” we outlined some of the strategies for systematically integrating ESG metrics into the investment process. By creating a comprehensive scoring system for ESG investment vehicles – and by working with leading technology providers like Confluence – asset managers can keep pace with a changing world while ensuring accuracy and maximizing productivity at every step.

As ever, where there is growth, complexity has followed. Because ESG has seen rapid adoption by asset classes beyond equities, many buy-side firms are ill-equipped to integrate ESG data in multi-asset portfolios, cutting them off from a wide variety of insights that can help them keep pace with a growing trend that has come to define our industry’s recent history.

Drill down into the process and it’s easy to see where traditional ESG processes are insufficient for asset classes like fixed income. Many asset managers, especially large ones, employ teams of dedicated ESG analysts tasked with leveraging ESG datasets to evaluate and assign a score to securities, enabling portfolio managers to efficiently access insights and make decisions accordingly.

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Those new rules were outlined by the SEC in an October 2020 press release that announced the adoption of Rule 18f-4. This new derivatives risk management rule significantly changes how derivatives and certain related transactions need to be handled by regulated funds, including mutual funds (other than money market funds), exchange-traded funds (ETFs), closed-end funds and business development firms. In our latest article, “Adapting Smoothly to SEC Rule 18f-4,” we examine the details of this rule and their implications for asset managers.

This rule change replaces a decades-old system that was confusing and, at times, even contradictory. The rule took effect on February 19, 2021, but the SEC has given funds a compliance transition period of 18 months. That means funds have until mid-August of 2022 to demonstrate that they are aligned with the new regime.

At a high level, the rule allows a fund to enter into “derivatives transactions” provided that it complies with restrictions on the issuance of “senior securities”.

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Confluence Blog

Three Critical Questions You Should Be Asking About the SEC’s Big Changes for Shareholder Reporting If you work in the US funds space and don’t live under a rock, then you know that this summer the SEC proposed comprehensive changes to the way that fund companies communicate with their shareholders, with a focus on retail investors (the “proposal”). Among a whole host of changes, the proposal would establish a new type of summary shareholder report, transform the annual and semi-annual report into an online presentation of data, and change certain components of the prospectus and the requirements for its distribution to existing shareholders annually. Now in the comment phase, the SEC will accept submissions until January 4, 2021. The implications for the industry are far-reaching and the world’s biggest fund managers are racing to figure out what this will mean and how they will both comply with and take advantage of the opportunity that the SEC presents with this rule.

As a global leader in investment data management automation for regulatory, financial and investor reporting, Confluence has been solving these kinds of challenges for our clients for close to 30 years. This proposal suggests a bunch of changes to the way that funds communicate with shareholders and we have been solving these exact challenges for our clients for years. We developed our flagship Unity Financial Reporting product in the wake of the Sarbanes-Oxley legislation to help our clients comply with certain funds requirements from that landmark law and have made significant investments into our solution over the years to make it the market-leading financial reporting solution that it is today.

• Will you use this rule as an opportunity to improve your product and your clients’ and shareholders’ experience?

Or are you simply going to react to the requirements and just do the minimum that needs to be done?

• As proposed, the rule would require fund data to be included in the twice-annual N-CSR filings and be posted online1, likely on a fund’s website.

• Will you use the same tools (people, process, technology) that you use to produce financial statements today to produce the new “summary” shareholder report?

1: https://www.sec .gov/news/press-release/2020-172

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Confluence Article

Adapting Smoothly to SEC Rule 18f-4

Download your free eGuide to learn: • What the rule change entails and the timeline for compliance • The challenges that arise in preparing for compliance • How Confluence’s solutions are designed to meet today’s compliance challenges

Efficiently Aligning Registered Funds’ Compliance and Risk Programs The SEC has fundamentally changed the rules to modernize the regulatory framework covering derivatives and to address how both derivatives themselves and the risks they pose to investors have changed.

Adapting and Adjusting Successfully Challenges arise as firms and funds try to minimize the operational disruption and additional costs regulatory changes can cause. Adding to their difficulties are compressed timelines and the not-uncommon need to handle several different mandate changes simultaneously. Overlay and intermingle all that with the IT infrastructure modernization initiatives – the digital transformations – that many firms have underway, and what looks like a fairly simple compliance program becomes a lengthy, complicated and expensive project.

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Confluence Podcast

Confluence On-Demand Webinars???

Navigating Today’s Regulatory Landscape Episode #1 - May 25, 2021 Host: Gary Casagrande Regulation has been top of mind for everyone in the asset management industry since the global economic crisis of 2008. More than 10 years later, we’re still dealing with an alphabet soup of regulations worldwide, so, where are we now in the evolution of regulation and regulatory reporting?

In our first episode of Confluence Connect, featuring guests Sean Tuffy, Head of Market and Regulatory Intelligence for Security Services at Citi, Fiona McNally, Director of Regulatory Product Management at BNY Mellon Asset Servicing, and Tom Pfister, VP of Global Product Strategy at Confluence, will cover the current regulatory landscape, the work that needs to be done to comply with regulations worldwide, and what the future has in store for regulations around the globe.

Guests from this episode: Sean Tuffy, Head of Market and Regulatory Intelligence for Security Services – Citi Fiona McNally, Director, Global Regulatory Management Group – BNY Mellon Tom Pfister, VP of Global Product Strategy – Confluence

Interpreting the CFA Institute’s New ESG Disclosure Standards for Investment Products Play-circle Watch Now

RegTech: Where are we Today on the Regulatory Journey Play-circle Watch Now

Navigating the SEC’s new derivatives rule Play-circle Watch Now

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EU SFDR: ESG Disclosures Webinar Play-circle Watch Now

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Confluence Blog

The Next Phase of RegTech: Automation, Consistency and More It’s no secret that the 2008 financial crisis served as a major turning point for asset managers and in particular their compliance and regulatory oversight teams. Beginning with the passage of the Dodd-Frank Act in 2010, these firms faced a tidal wave of new regulations designed to foster transparency and accountability in the capital markets. This flurry of activity propelled the growth of a relatively new domain: regulatory technology, or RegTech.

Confluence Video

We Are Confluence Watch Now

Fast forward to today, the need to remain compliant is more relevant than ever as regulators around the globe continue to beef up reporting requirements.

As the space continues to mature, focus is shifting from the what to the how – that is, from simply being compliant to identifying how asset managers and service providers can leverage technology to refine existing compliance and reporting procedures and execute them with efficiency, precision and cost-effectiveness.

To do this, the industry needs integrated solutions that streamline processes and standardize actions across the myriad of reports that are now required. Here, we’ll explore some exciting innovations that signify the next phase of RegTech – and how we at Confluence are working to deliver this future.

Manually sifting through massive quantities of data to create standardized reports isn’t a tenable situation. The sheer volume of reporting requirements means errors are inevitable, and data automation is the only solution. By leveraging RegTech solutions, asset managers can digitalize and streamline reporting processes, easing the burden on their compliance teams and enabling better performance and scalability. This kind of straight-through processing enables a higher level of nimbleness and scalability as this era of regulatory uncertainty continues.

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