expanding your investment...

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




» Tracking purchases that have yet to settle

» Descriptive information

» Inconsistencies in data

» Schedule D

Syndicated Loans


» Complex structure of securitization

» Unique transaction types



» Facility vs. contract

» Accruals

» Settlement period


» Categorization and descriptive information

Direct Mortgage Loans


» Loan details and prospectus


» Cash flow updates


» 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


» Unique statement format


» Equity Method (GAAP and STAT)

» Unique transactions


» Schedule BA

» Additional RBC Charges

Derivative Instruments

• Options

• Futures

• FXF

• Swaps

Options


» Underlying tracking

» OTC contacts


» Short positions


» Schedule DB

» Risk analysis

Futures


» Underlying tracking

» Margin tracking


» Changes in market value through income

» Short positions


» Schedule DB

Forwards


» Forward rate tracking


» Accounting for changes in FX rates

» Interpolation vs. straight line


» Schedule DB – Part A

» True exposure

Swaps


» Information difficult to access


» Accrual for payments


» 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

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