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In November 2008 Fitch Ratings

revised the London-based assetmanagers rating from M2 to M2+.

It noted, The rating also factors in

the extent of Schroders research resources

and the solid risk management

framework. The addition of the +

modifier emphasises strength in the

companys investment infrastructure and

the technological platform with notable

progress being made in data management

and integration (...)2.

Other recent upgrades where Fitch made

specific reference to technology as a

determining factor included Groupama

Asset Management, RFM Investment

Management, Rothschild & Cie Gestion

and Robeco.

THE OXYGEN OF ASSET

MANAGEMENT

That Fitch should include technology in

its set of five rating categories3 - company

& staffing, risk management & controls,

portfolio management, investment

administration and technology - is notaltogether surprising. As Andrew Cox,

partner, and head of regulatory capital at

actuaries and consultants Lane Clark &

Peacock explains, Data and informationis the oxygen of any kind of insurance or

asset management business. If you dont

know what business youre running then

how can you expect to run it well or to

react to changing environments and

situations? The ability to know what your

business is and to know what your

business is doing quickly is, we think,

vital. And that in the end comes down to

IT systems, most of all because there are

vast amounts of

information that any

asset manager will

need about all the

holdings of differentindividuals, contracts

that theyve got in

place etc. So the

ability to be able to

turn that vast amount

of very detailed

information into

usable and useful

summaries in a

matter of days rather

than weeks is pretty

important.

Moodys Investors

Service takes this

into account when evaluating and

assigning its Investor Manager Quality

ratings. Moodys believes, it explains,

that the successful operation of an

investment management firm relies also

on the ability of the firm to set up an

appropriate investment infrastructure,

including the use of real-time portfolio

management systems and various external

data service providers to deliver targeted

levels of portfolio management,

accounting, shareholder services, and

legal/control functions. In this area, face-

to-face discussions are reinforced by on-site reviews.

It is also recognised that the failure of IT

operations could threaten an investmentmanagement companys ability to manage

and monitor efficiently its offerings and

provide adequate client services. For this

reason, while stopping short of an

assessment of enterprise-wide operations

risk, we review the content and frequency

of back-up systems as well as the tests of

reliability of the key information feeds.4

A spokesman for Standard & Poors

notes that, For financial institutions

ratings, technology is not a major area of

focus [for us]. Rather, we are more

interested in the broader enterprise risk

management of the firm (risk governance,credit risk etc.) and the degree to which

senior management can answer our

questions and present credible, timely

management reports. Within this, we do

also focus upon operational risk, which is

important to asset managers, for example

disaster recovery, how management

monitor operational risk etc.

BASEL II / SOLVENCY II

The rating agencies then do not offer

themselves as detailed analysts of data

systems and technology platforms. It is

quite clear however that they do attach a

significant degree of importance to the

technological underpinning of an asset

management or fund management

business when apportioning ratings.

With hindsight it was inevitable that ITs

role in risk management and capital

adequacy would become more important,

even before the financial crisis beginning

with the US sub-prime fiasco.

Information and the efficiency of systems

lie just below the surface of the criteria of

Basel II for non-life business and

Solvency II for insurance and asset

managers with a life insurance aspect to

them. There is a strong emphasis on riskmanagement and controls and on

operational risk in Basel Pillar 1. And

e stakes howeverhave become considerably

heightened in light ofthe recent volatility innancial markets.

# Credit ratings:IT in the spotlight

When Schroders Investment Management received a rating upgrade, the strengthof its technology platform was a key factor in the rating agencys opinion.by Richard Willsher

Schroders has achieved key milestones in its Londonoperations with respect to its technological platform

following implementation of SimCorp Dimension as themain accounting and repository tool. Risk managementroutines have been responsive to the volatile marketenvironment and included heightened surveillance ofcertain risks.

Reviewing and Rating Asset Managers, Fitch Ratingsreport, 29th May 2007.

Approach to Evaluating and Assigning InvestorManager Quality Ratings to Asset ManagementCompanies, Moodys Investor Service, 31st August 2005.

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quality information and robustness of

systems falls within the view of regulatory

oversight in Pillar 2.

The stakes however have become

considerably heightened in light of the

recent volatility in financial markets.

Anything other than a rapid response to

marking assets to market and speedy

quantifying of positions poses a

reputational risk to an institution.

Both Basel II and Solvency II are, in the

end, about risk management, says

Andrew Cox, and the first step to

managing risk is identifying risk. The

only way you do so is by knowing what

your business is doing, what risks its

running and what its exposures are and

this derives from the IT system. There at

the heart of it a good data system is a pre-

requisite for good risk management. He

goes on to say that the UKs Financial

Services Authority is particularly keen to

focus upon the integrity of data.

From my personal experience in working

with clients to help them with both

regulatory capital and Solvency II,

concludes Cox worryingly, it is

remarkable how difficult it is to get

information or even to find someone who

actually understands what the information

means. There is a lot of room for

improvement. Different companies are atdifferent levels. Above all people must

not think that this is a solved problem.

With the current pressure from regulators,

pressure from markets and pressure on

the models applied by rating agencies in

arriving at their ratings, it looks inevitable

that IT will be further thrust into the

spotlight. Ratings criteria will have to

place increased emphasis on technology,

even more than they currently do and

anything less will again draw criticism of

the rating agencies themselves. In the

rating process there will be winners and

losers. Ratings will go up or down

depending on how flexible, scalable,

robust and quick their systems are in the

way they respond to the stresses placed on

their asset managers businesses.

Richard Willsher is a London-based

financial journalist and former investment

banker.

Credit ratings:IT in the spotlight

...it is remarkable how difficult it isto get information or even to findsomeone who actually understands

what the information means.