The COVID-19 pandemic created numerous operational challenges for both institutional investors and asset managers. Market volatility caused the price of some assets to drop sharply while others became harder to value. Investment risks spiked and required expertise and careful management to analyse and resolve.
At the same time, effective management of treasury functions became more difficult, with rapid cuts in interest rates, large redemptions from certain money market funds creating possible liquidity risks and prime brokers concerned about counterparty risk looking to change margin rates.
For most institutional investors and asset managers, managing these hazards would have added to the complexity of navigating the crisis itself from a business and personnel perspective. The task would have been all the more challenging because of the varied level of operational risk understanding across different firms.
While the COVID-19 crisis sparked an increase in activity for AMX, as for all industry players, the technology we had built proved more than capable of coping in this stressed scenario, in addition to its BAU effectiveness. As always, our focus is on maintaining governance standards and risk management, including supporting our clients and managers with their own governance and risk management targets. In addition, through our relationships, our technology and our scale, we have been able to garner insight into what is happening across the market to facilitate this effort.
To ensure business functions could operate smoothly, AMX had already formulated robust continuity plans so staff could do their jobs from home. As the Covid-19 crisis started to escalate in the first half of March, the business switched to remote working.
At the same time AMX contacted our delegates and service providers, such as our fund managers, to ensure they had similar plans in place. For example, our Markets and Treasury team has been in active two-way conversations with our key counterparties and prime brokers so that we can gain comfort regarding their abilities to continue to operate in this environment.
Valuations in thin markets
As the month progressed, the crisis started to impact financial markets, sparking sharp revaluations. This made assessing the net asset value of different funds more complex than usual for fund administrators.
For example, thin market liquidity made it harder to value a number of assets during the second half of March. When these situations arise, it is the role of AMX’s Valuation Committee to opine on the asset valuation in a manner which is independent from the fund manager.
Managing investment risk
Fund Risk Management is one of six key managerial functions for which the Central Bank of Ireland mandates a named “Designated Person” to take responsibility. Our Fund Risk Designated Person is supported by AMX’s dedicated Investment Risk Team. Each portfolio’s investment limits, as required under the AIFMD and UCITS Rule Books, have been codified, with the team monitoring the relevant thresholds, limits, concentrations and other rules. These limits address matters such leverage, liquidity, sector and issuer exposure, and value at risk.
The Investment Risk team provides an important layer of independent risk oversight. A key concern they look to address is the ‘tin risk’ i.e. is there a match between the investment strategy being implemented in practice and the investment philosophy stated in the fund’s investor-facing documents?
The recent sharp market correction and volatility has sparked an uptick in activity for the Investment Risk Team, who have been in increased communication with our managers, discussing risk profiles and fund performance.
In particular, the team reached out to our managers in order to better understand their investment challenges and mitigating actions. This included looking at how investment universes and risk premia/strategy behaviour was affected, the impact on trading and liquidity, and to understand if, or how, funds were adapting, and how AMX might help.
But during times of market stress, managers can breach limits – AMX’s risk-based approach surfaces any exceptions through the setting of ‘soft’ AMX-designated limits and ‘hard’ mandated regulatory limits within which exceptions are viewed daily and remedial action then taken. The team continues to monitor the risk profiles of all the funds on a daily basis and manages these in accordance with the pre-agreed limits.
Exceptions to the monitoring result in one or more of the following actions:
- Interrogation of the underlying data and risk calculation to weed out false positives
- Internal analysis and discussion
- Escalation to mangers to clarify nature of the exception, its cause and resolution
- Reporting to the Risk Committee, Designated Person, Fund and Management Company Boards and/or Regulator, as required
The Investment Risk team also stepped up its monitoring of AMX’s market counterparties. We continue to have an open dialogue with our managers and our counterparties to anticipate and mitigate any issues. These include identifying scheduled fund capital activity and evaluating liquidity in these volatile markets.
By sweeping the funds’ excess cash into money market accounts, AMX’s Treasury team seeks to ensure this money is well protected while also earning an appropriate yield.
In addition, the team has closely monitored the liquidity profile and size of these money market funds to ensure that the recent market moves, and redemptions seen in those funds, didn’t negatively impact AMX’s investments.
During the crisis, prime brokers and other counterparties have been in frequent contact with AMX’s Markets team. Our platform’s scale, and institutional corporate backing, along with the independent risk and valuation functions described earlier provides our counterparties with a certain level of reassurance. On the other hand, individual managers, especially boutique firms, may be viewed as higher risk in such an environment. This could lead to higher margin rates and collateral calls which could negatively impact investors.
In the current climate, our oversight standards have not changed. The underlying data points are more volatile but existing procedures and systems have carried on as normal. We are having more conversations with our partners, investors and managers, but the tasks we undertake are the same. Our mantra is: more volume; same quality. As always, we’re here to support our clients’ investments and our managers’ processes, looking to ensure the overall experience is streamlined and efficient for all parties, and most importantly robust and adaptable.
During the recent market volatility our investment and operational risk oversight has never been more relevant. To support you and your investments, AMX has increased the level of scrutiny and monitoring of the funds, the asset managers and the market counterparties, leveraging our technology to do so. Working with our institutional investors and managers in a crisis environment has put our platform to the test and we are confident that we are well placed to continue to provide robust support through the current situation and beyond.
Photo credit: Alena Ingvarsdottir