Risk disclosure and transparency are fundamental requirements for asset managers, investors, and regulators alike. By enabling consistent and accurate reporting of regulatory capital, liquidity risk, and other risk factors, the Open Protocol Enabling Risk Aggregation (Open Protocol) has become the standard for risk self-reporting in the hedge fund industry.
But while the report templates are largely consistent across providers, the process of aggregating the data can be challenging. How the relevant data is captured, enhanced and presented can be complex and time-consuming depending on the reporting system used and the availability of underlying information.
Access and timing—along with accuracy—become imperative when reporting updates and/or requirements to integrate new asset types are announced. Risk inputs and calculations vary across assets, requiring knowledge of how to identify, extract, capture and then present the new data in the established templates.
The current case in point is the October 5, 2021 announcement that effective April 1, 2022, all Open Protocol reports are expected to comply with requirements to include crypto and Environmental, Social, and Governance (ESG) exposures. With just under six months to identify, build, test and launch the new reporting tabs, the ability to obtain and create the proper reports leaves little room for errors. And delays in meeting the deadline or in publishing reports can result in inaccuracies or even fines.
Sourcing, Enriching, and Presenting Data
Implementing new Open Protocol requirements requires research and work to prepare the data for analysis and reporting. To start, links to fund administrators are key to sourcing the needed position data. But once the links to acquire information are established, expertise is required to further enrich the information to include curves, histories and any additional attributes necessary for calculating the Open Protocol risk measures.
Financial models must perform the risk calculations and send them to the reporting system to populate the reports. Providers that have fluency with a range of risk models and the reporting standards are critical at this point to appropriately and accurately supplement the data. Risk analysts who are well-versed in Open Protocol standards and are engaged with the Open Protocol industry working group are best positioned to ensure ongoing communication and a smooth roll-out. And finally, following review and approval of these materials, the reports should be distributed as a whole with the other asset templates.
Reporting on Crypto and ESG
The requirements for crypto (more broadly included under the Open Protocol as “Digital Assets”) and ESG exposures highlight the importance of knowing how to obtain and deploy the data—and how imperative it is to understand the details of risk reporting and the Open Protocol standards. Reporting details for each of these new elements are as follows:
Crypto and other digital assets are contained in Tab 13 of the Open Protocol reporting template. This tab consists of several data points and aggregation schemes, including:
- Total dollar exposure to crypto and stablecoins (based on notional amounts, or delta-adjusted amounts for options).
- Percentage of AUM represented by this exposure.
- The number of issuers in the portfolio for these assets.
Tables for aggregation show type of crypto, region, type of instrument (e.g., physical, future, ETF etc.) and liquidity. As with other Open Protocol tabs, there are up to three grades of reporting for digital assets, with Grade 3 being the most granular.
Tab 14 covers ESG exposures. Similar to Tab 13 for digital assets, Tab 14 requires total dollar exposure to ESG factors, as well as the percentage of AUM and number of issuers. Here again, exposures are measured on a risk-adjusted basis (e.g., notional for underlying, delta-adjusted for options and swap equivalents for rate sensitivities). These exposures are then identified by industry and sub-industry, within broad groups of asset classes.
Integrating new asset types can be complex. Providers with end-to-end risk reporting capabilities, from in-house fund accounting and fund administration teams to robust reporting software and technologies, generally have a leg-up as interconnectivity can allow for more rapid and complete data aggregation. These providers can handle all phases of the reporting process: position sourcing, attribute enrichment, financial modeling, report writing and report delivery. And, when a fund is also a fund administration client, reports can be built on top of that fund’s own fund administration data, allowing for a self-reconciliation process with the investment book of record.
SS&C’s Open Protocol Service for Crypto and ESG
Tab 13 and Tab 14 reports for crypto and ESG exposures are available now on SS&C’s Open Protocol service. SS&C’s Open Protocol offering is a natural extension of our core risk solutions, drawing on skills in data management, financial modeling, and report writing. Open Protocol clients can also utilize our risk service for bespoke reporting, as well as for regulatory needs such as Form PF and AIFMD Annex IV filings. SS&C can demonstrate these capabilities upon request.