James [00:00:02] Hello and welcome to this edition of our State of the Street series, where we discuss the power of investment servicing operations to help the world's investment institutions unlock growth and value. Today we're talking about fund accounting. I'm James Redgrave, Vice President of Global Thought Leadership and Editorial at State Street. And I'm joined by Veronica Lee, Global Head of Accounting Product Management at State Street. Fund accounting operations have undergone significant transformation over the past few years as technology and changes in client demand have driven efficiencies and improvements. Veronica, how has technology improved the ability of fund accounting operations to provide accurate fund valuations in recent years, in terms of getting calculations right initially and catching errors?
Veronica [00:00:43] That's a good question, James, so accounting administrators are shifting to a tech-led operating model to optimise workflows. It's really all about efficiency. So leveraging the combination of process orchestration, monitoring and alert-based exception management to remove any of those manual processes really to drive straight through processing while quickly identifying true breaks. So it's important that with valuable resources that they're focused on really resolving problems. So these oversight technologies are often complemented with machine learning and artificial intelligence to further reduce any manual intervention that might be required for more complex processing scenarios. So overall, the automation or automated detection means accounting professionals can spend less time on identification and more time on issue resolution, meaning less errors and more accurate NAVs.
James [00:01:46] That's interesting, thank you, Veronica, how have asset manager or asset owners approached due diligence with their outsourced fund accountants developed over the same period of time that we've just been talking about?
Veronica [00:01:56] So we've really seen a variety of expectations. In some cases we have asset managers, they want to be part of signing off the NAV prior to dissemination and in other cases they want to be aware of exceptions and how they are resolved, but not necessarily play a role in the NAV release process. So the timing for client oversight and can also vary and it will depend, if you know, NAV needs to be produced same day or the following day. But I would say that the SCC has a pending rule, which is not final yet, but has been proposed. It's 205-411 that would prohibit registered investment advisors from outsourcing certain services or functions without meeting specific requirements and then needing to provide some ongoing due diligence and oversight. So in other words, if you're outsourcing your accounting administration, there's going to be another level of oversight that's required for investment advisors. And then for asset owners, including insurers such as asset owners, more generally, the oversight is not just about accuracy. It really is also about performance and analytics. They want to see the valuation roll forwards and for each sub advise portfolio, they also want to look through to the underlying investment strategies and the rates of return. So their perspective on oversight could be slightly different. So I guess to sum it up, there's just a variety of expectations depending upon the client segment.
James [00:03:39] And in terms of the oversight, we talked about technology earlier, how has that had an effect on this?
Veronica [00:03:44] So there are a number of technologies in the industry used for client oversight, and we are starting to see more surface to cater to specific like asset owner requirements where, you know, it's a very complex structure with multiple levels and the need to look through those levels. To date, State Street has chosen to develop proprietary solutions for differentiation. We want to differentiate ourselves that way, but this is constantly evaluated as the market requirements evolve.
James [00:04:17] And have we seen much in the way of innovations in terms of accurate technology-led from the accounting developed in the private markets and the illiquid assets space, specifically?
Veronica [00:04:25] Absolutely, I would say it's not as advanced as probably some of our more traditional spaces, But now more than ever, it seems asset diversification to achieve better returns is seen across products and segments. So you don't just see illiquid assets primarily and alternative products anymore. At State Street, we are not just seeing growth in private market portfolios, but we're also seeing more traditional products like closed end funds, insurance accounts, retirement accounts investing in private assets. This means our focus on private markets servicing capabilities across the segments we service needs to ask to account for, again, private assets. So there is technology that comes to help streamline the processing for these non-standard assets. So there's definitely technology that helps that streamlining, whether it's capturing the terms and conditions or transaction information from various formats, which is very common when you get into private assets or for capturing pricing information, market values regardless, there is also AI and machine learning that can prove critical to achieve straight through processing because, you know, when you talk about private markets, you're talking about less standardisation around how we receive the data.
James [00:05:49] I think about the future now. Are there any sort of new developments ongoing or upcoming that are currently changing the way fund accounting operations are likely to develop into the future?
Veronica [00:05:59] The top two that come to mind are regulation and the pressure on costs to serve. So the first is the pace of regulatory change is going to continue to necessitate innovation, and that's because we have regulators who are focused on, as I mentioned previously, the SEC's proposed rule oversight. There's also a big focus on liquidity and there are rules that are focused on ensuring investors have full transparency to the information for the portfolios to make sound investment decisions, and they're expecting that to be timely, easily digestible information to make these critical investment decisions. So some examples would be in September of 2022, the SEC required compliance with Rule 2a-5 that's in effect now, and that addressed the valuation practices that the role of the board of directors with respect to fair valuing and investment for registered investment companies. But again, it was all around oversight and valuation governance, and that meant providing access to a more robust set of accounting and valuation data for clients. And I spoke previously about pending oversight rule for registered advisors again. And then in July of this year, the SEC finalised money market reform with some of the requirements driving technology and process changes so once again changes, regulatory items causing changes to operational and technology needs. So we see this in spades as a result of regulatory change or market changes, even like the shortened settlement cycles that many in the industry are embracing and, you know, changing or adapting to comply with. And then all of this is underpinned by the importance of standards and optimised processes that are easier to build upon to satisfy these types of changes quickly. So the more automated, the more streamlined your processes are, the more quickly you can respond when there is a new regulatory change introduced to implement that change. And we continue to see operations leverage COEs for scale, particularly where a global client base is being serviced. So all of these things have to do with technology and innovation, whether it's regulatory, requiring innovation, if it's looking for efficiency and straight through processing, even operating models and in terms of optimisation around the operating models, might be another reason why we see technology being so key.
James [00:08:36] Veronica, thank you very much for joining me.
Veronica [00:08:38] Thanks for having me, James.
James [00:08:39] And thanks for listening, so listen to this and other editions of State of the Street. Visit us at statestreet.com
