Expanding Your Investment PlaybookSummer KisnerProduct Owner, Clearwater Analytics
Nicholas Maese, CPA Senior Financial Analyst, Seaboard Corporation
Learning Objectives
• Understand some of the unique challenges for reporting on complex assets.
• Explore best practices for data management of complex assets.
• Learn about industry trends as they relate to increased regulatory reporting for derivatives.
Agenda
• What is complexity?
• Complex asset classes
• Peer case study—Seaboard
• Best practices
• Industry trends and updates
What does complexity mean?“Complex” to a portfolio manager might not mean “complex” to an accounting department
• Investment structures
• Increased number of data sources
• Operational burdens
• Accounting treatment
• Regulatory reporting
Data sourcingHow do investors get data for complex assets?
• Asset managers
• Internal calculations
• Market sources
» Bloomberg
» Reuters
• Brokers
• Issuer for private placements
• General partner for limited partnerships
• Etc…
Support for OperationsIncreased use of third-party data providers can complicate business operations.
• Flexibility of investing without overburdening financial and operating teams
• Understanding accounting options while ensuring consistency of approach
Accounting Treatment & Regulatory Reporting
• Statutory is to protect policy holders
• GAAP and IFRS is for disclosures to shareholders
• Tax is for government revenue
New assets + multiple bases of accounting = complexity
Polling Question #1
Complex Asset Classes
Complex fixed-income and alternatives
• Complex fixed-income and alternatives
• Structured Products
• Private Placements
• Syndicated Loans
• Limited Partnerships
• Direct Mortgage Loans
Structured Products• Challenges in data
» Complex structure of securitization
» Detailed data availability
• Accounting challenges
» Incomplete security information
» Tranche tracking and updates
» Cash flow availability and updates
• Reporting consequences
» Categorization and descriptive information
Private Placements
• Challenges in data
» Security information difficult to obtain
• Accounting challenges
» Incomplete security information
• Reporting consequences
» Tracking purchases that have yet to settle
» Descriptive information
» Inconsistencies in data
» Schedule D
Syndicated Loans
• Challenges in data
» Complex structure of securitization
» Unique transaction types
• Accounting challenges
» Incomplete security information
» Facility vs. contract
» Accruals
» Settlement period
• Reporting consequences
» Categorization and descriptive information
Direct Mortgage Loans
• Challenges in data
» Loan details and prospectus
• Accounting challenges
» Cash flow updates
• Reporting consequences
» CM category determination
» Schedule B
Based on 2016 annual Schedule B filing Life P&C
Total book value for US insurers $ 868,412,870,326 $ 41,606,605,355
Number of direct mortgage loans 223,295 47,079
Limited Partnerships
• Challenges in data
» Unique statement format
• Accounting challenges
» Equity Method (GAAP and STAT)
» Unique transactions
• Reporting consequences
» Schedule BA
» Additional RBC Charges
Derivative Instruments
• Options
• Futures
• FXF
• Swaps
Options
• Challenges in data
» Underlying tracking
» OTC contacts
• Accounting challenges
» Short positions
• Reporting consequences
» Schedule DB
» Risk analysis
Futures
• Challenges in data
» Underlying tracking
» Margin tracking
• Accounting challenges
» Changes in market value through income
» Short positions
• Reporting consequences
» Schedule DB
Forwards
• Challenges in data
» Forward rate tracking
• Accounting challenges
» Accounting for changes in FX rates
» Interpolation vs. straight line
• Reporting consequences
» Schedule DB – Part A
» True exposure
Swaps
• Challenges in data
» Information difficult to access
• Accounting challenges
» Accrual for payments
• Reporting consequences
» Schedule DB – Part A and D
» Risk analysis
EUR28%
GBP6%
JPY6%
USD60%
IRS Volumes By Currency On The 3 Largest Clearing Houses
As Of 6/30/2017
Case StudyNicholas Maese - Seaboard
Best Practices
Scalable Solutions
• Manual and complex workarounds
» Manual data input
» Audit vulnerabilities
» Transactions unsupported
• Technology increasing automation
» Trade Order Management systems
» Increasingly automated security processes
» Automated accounting solutions
Data Management
• The gap between portfolio complexity and accounting systems is a moving target
» Use of technology can help with complex processes
• Technology that can aggregate and integrate is key
• Understand the data requirements
» Internal systems
» External systems
Data Processing
• Design a daily process
» Positions and security master
» Transactions/trades
» Cash flows/analytics
Planning
• Sources and organization
» Notify stakeholders early and test thoroughly before reporting is needed
» The best source of data is the one closest to origination
» Have a data consolidation strategy
• prime broker, aggregated reporting
Industry UpdateIncreased regulation for derivativesInvestment trends
More than 40% of insurers currently invested in non-traditionalassets are looking to expand their exposure in those areas
Market Shifts
• Market conditions
» Strategies are ever evolving
» Barriers to entry are lowering
» Accounting/reporting forced to play catch-up
• Key themes
» Shift away from public fixed income
» Investment in illiquid asset classes
» Investment in non-traditional asset classes
5% of insurers not currently invested in non-traditional assetsare looking to invest in them for the first time
>40%
5%
Relevant Dates
Compliance Calendar as of 7/1/2017
Increased Margin Regulation
• Hurdles that market participants faced
» Determining what is necessary to do as a firm
» Implementing the operational changes
» Staying in compliance
Polling Question #2
9%
36%43%
60%
0%
10%
20%
30%
40%
50%
60%
70%
CME JSCC LONDON CLEARING HOUSE EUREX
Perc
enta
ge In
crea
seRise of notional value from Q1 & Q2 2016 to Q1 & Q2 2017
Bank Loans by Number of Securities
2012 2013 2014 2015 2016 2017
2012 2013 2014 2015 2016 2017
FUTURE
FXF
OPTION
SWAP
Derivatives by Number of Contracts
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
ABS
CMO
MBS
Structured Products by Number of Securities
Questions?Summer KisnerNicholas Maese, CPA
• Take the post-session survey in the Clearwater Events app
• Take the Clearwater Client Benchmark Survey in room 440 and earn Clearwater swag.
• Don’t miss the Monday networking reception from 4:30 – 6:30 p.m.
• Resources:
Reminders