expanding your investment...
TRANSCRIPT
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Expanding Your Investment PlaybookSummer KisnerProduct Owner, Clearwater Analytics
Nicholas Maese, CPA Senior Financial Analyst, Seaboard Corporation
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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
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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
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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…
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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
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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
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Polling Question #1
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Complex Asset Classes
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Complex fixed-income and alternatives
• Complex fixed-income and alternatives
• Structured Products
• Private Placements
• Syndicated Loans
• Limited Partnerships
• Direct Mortgage Loans
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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
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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
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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
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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
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Limited Partnerships
• Challenges in data
» Unique statement format
• Accounting challenges
» Equity Method (GAAP and STAT)
» Unique transactions
• Reporting consequences
» Schedule BA
» Additional RBC Charges
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Derivative Instruments
• Options
• Futures
• FXF
• Swaps
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Options
• Challenges in data
» Underlying tracking
» OTC contacts
• Accounting challenges
» Short positions
• Reporting consequences
» Schedule DB
» Risk analysis
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Futures
• Challenges in data
» Underlying tracking
» Margin tracking
• Accounting challenges
» Changes in market value through income
» Short positions
• Reporting consequences
» Schedule DB
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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
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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
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Case StudyNicholas Maese - Seaboard
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Best Practices
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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
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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
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Data Processing
• Design a daily process
» Positions and security master
» Transactions/trades
» Cash flows/analytics
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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
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Industry UpdateIncreased regulation for derivativesInvestment trends
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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%
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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
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Polling Question #2
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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
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Bank Loans by Number of Securities
2012 2013 2014 2015 2016 2017
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2012 2013 2014 2015 2016 2017
FUTURE
FXF
OPTION
SWAP
Derivatives by Number of Contracts
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
ABS
CMO
MBS
Structured Products by Number of Securities
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Questions?Summer KisnerNicholas Maese, CPA
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• 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