Institutional share class reporting

Article

Institutional share class reporting, the best practice for client servicing

Institutional share class reporting is more predominant in the current European regulatory frameworks (Basel 3, Solvency II, UCITS). This regulatory context concurs when it comes to emphasis put on the disclosure of investments’ true risk profile, making necessary the production of risk data at the most granular level. This means for investment funds a necessity to produce risk reports at share class level in order to reflect fairly the costs and risks of the share class in which investors are invested.

In this context, asset managers wishing to distribute their products to European institutional investors (banks, pension funds, insurance companies) need to adapt their reporting processes to allow accurate share class reporting. This involves a data collection and allocation process and multiple reconciliation steps that go beyond a simple pro-rata allocation of the investment portfolio across the different classes.

Impact on disclosures

Because of currency overlay and share class hedging, disclosing accurate reports at share class level can have a significant impact on currency risk disclosure.

The table below displays the effect of two allocation methods used for the compilation of regulatory reports at share class level. The table is presented based on two share classes, with different currency hedging:

  • Share Class1 (SC1): No currency hedging
  • Share Class2 (SC2): Currency hedging

We also consider two methodologies for producing the report at share class level:

  • Accurate: Accurate allocation
  • Naive: Naive allocation Share Class NAV/Fund NAV

Disclosures impacts coming from different allocation methods

Share Class ID Methodology Currency hedging  % Weight for Pool positions % Foreign CCY at Share Class level % Out of Scope Positions
Share Class1 Accurate N 20.5% 0% 0%
Naive  20% 60% -1.5%
Share Class2 Accurate Y 20.5% 0% 0%
Naive 20% 40% -0.5%


 

Although by using different methods, the weight computed is roughly the same (i.e. 20 percent for each method), a wrong allocation of these weights can have a significant impact on share class reporting:

  1. For a non-hedged and hedged share class, an incorrect weight allocation would increase the percentage of foreign currency exposure. For SC1, the increase is from 0 percent to 60 percent and SC2 0 percent to 40 percent. This increase is explained by taking into account FX Forwards used for currency hedging related to other share classes
  2. In the case of a non-hedged share class, an inaccurate allocation of FX forwards would increase the CVA (Counterparty Valuation Adjustment) and related capital charge. The impact is explained by taking into account the counterparty risk of FX Forwards not related to the share class considered. Similarly, a hedged share class might see its CVA artificially decreased
  3. Lastly, with an inaccurate allocation, the share class would include investment lines related to other share classes, which could confuse recipients of the reporting. In our illustrative example above, this represents 1.5 percent and 0.5 percent of the NAV of the share class

Accurate

Accurate

Conclusion

Share class reporting enables institutional investors to monitor their exposures and to comply with their regulatory reporting requirements. Beyond regulatory compliance, producing accurate reports at share class level may allow them to reduce their own funds requirements.

In this context, asset managers who adopt accurate share class institutional reporting will have an ace up their sleeve when it comes to best practice client servicing.

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