Completing and delivering consistent and accurate reports across multiple forms and regulatory regimes is a data management task of the first order. All but the largest managers are tempted to out-source the work, but they cannot always find the services they want.

Late last year, the prime services group at Deutsche Bank surveyed chief operating officers (COOs) at hedge fund managers in Europe and North America. Worryingly high proportions of the respondents in both the United States (a quarter) and Europe (an eighth) were spending at least 75 per cent more time on regulatory issues. The average COO was devoting 50 per cent more time to compliance, legal and regulatory matters.

The Costs of Compliance, a study of 200 managers commissioned by the Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA) from KPMG, estimated that the hedge fund industry was by 2013 spending $3 billion a year on compliance. The research suggested that the cost per firm varied between $700,000 a year for smaller managers to $14 million a year for the largest. Managers running less than $250 million told the study that their compliance expenditure accounted for more than a tenth of their operating costs.

The knock-on effects of this compliance tax were evident in the 2013 Business Expense Benchmark survey from Citi Prime Finance. That study concluded hedge fund managers need to be managing at least $300 million if they are to cover operational and regulatory costs out of their management fees alone. In the same survey, conducted a year earlier, the authors estimated managers running less than $250 million spent an average of 198 of their 200 basis point management fee on operations and third party service providers alone.

Burdens of this kind, if not temporary, are unsustainable. As the table shows, the regulatory reporting burden is permanent, not temporary, and it is also wide-ranging and unceasing. So it is scarcely surprising that a large proportion of respondents (40 per cent) to the Deutsche Bank survey had recruited extra staff and just as many had increased expenditure on non-staff costs such as reporting technology and external legal advice by at least a quarter.

Another (or additional) option is to outsource the work. At first, most fund managers subscribed to the view that they could internalise all aspects of regulatory reporting, and some still do. One chief compliance officer at a large, multi-billion dollar hedge fund recalls that filing Form PF alone for the first time consumed approximately 100 man hours, but he says the time involved has since fallen markedly. “Firms acclimatise to regulatory reporting,” explains Angus Milne, chief compliance officer at The Children’s Investment Fund in London. “When the then Financial Services Authority (FSA) introduced its hedge fund survey, a number of managers complained. Now, people do it without much fuss.”

Other managers drew different lessons from discovering how much work was involved. “Initially, fund managers undertook these compliance obligations in-house and sourced all of the relevant data sets from prime brokers, custodians and fund administrators to compile regulatory reports such as Form PF,” says Stuart Feffer, senior vice president and co-head of Global Fund Services at Wells Fargo in New York. “This made sense the first time around as managers wanted to fully understand what was going on, so in time they could outsource it and properly supervise those providers undertaking the work.”

Fund administrators are certainly eager to take on some aspects of the work. “Appointing a service provider such as a fund administrator to collect and compile Form PF makes economic sense,” says Blair Henderson, director of business development at Mitsubishi UFJ Fund Services in London. “It frees up managers’ time, helps them devote resources to other aspects of their business and enables them to focus on what they do best – managing investor capital.”

However, fund administrators are unlikely to offer the service on a stand-alone basis. “We only offer these services to managers who are clients of our fund administration business,” says Stuart Feffer of Wells Fargo. “We do not go out to other administrators and import their data, except in circumstances where a manager uses us for some or all of their funds and needs information on funds not serviced by us for the sake of completeness. While we are perfectly well equipped to offer these compliance services on a stand-alone basis, that is not our business model. We hope funds using other administration providers will ultimately migrate to Wells Fargo. We may change this approach someday, but any change will be driven by the needs of our clients.”

The primary need of clients is to buy time. And the principal eater of time is obtaining accurate data from multiple sources, consolidating it, and then delivering it to multiple regulators in a consistent and timely fashion. Larger managers inevitably have multiple fund administrators and prime brokers working across a variety of different funds. The data sets required for regulatory reports such as Form PF, Form CPO-PQR, Annex IV and Open Protocol are unlikely to be held in one database. Even if they were, filings vary as to whether the data should be submitted on a fund-by-fund basis, or an aggregate basis, or both.

Firms already supplying data warehousing and aggregation services to fund managers have found themselves well-placed to assist. “We have a data warehouse which will assist managers with Form PF, although our main raison d’etre is to help support their investment process,” explains Marshall Saffer, founder of MIK Fund Solutions, a data management business. “Nonetheless, Form PF is an add-on service we provide. What we can do is calculate the data accordingly, as required by Form PF, and supply it to the manager who will then provide the report to the Securities and Exchange Commission (SEC).”

Other vendors are developing technologies that help, but have to build them on a clear understanding of where the data is, and how to dissect and present it. “It is very rare for a fund manager to have the data - be it transaction data, exposures, borrowing, cash, assets under management (AuM), collateral, performance details, investor data and risk data - in one place," says Gurvinder Singh, chief executive officer at Indus Valley Partners (IVP), a New York-based technology vendor. "The first thing we do is we identify where the data is being held. Is it with a fund administrator? Is it with RiskMetrics? Is it on a hosted portfolio management platform? Is it with the custodian or prime broker? Once you have identified that, we have to assess how complex the investment strategy is, which may impact any fund-specific interpretations. If the strategy is complex and illiquid, it might take longer. If it is liquid, then it is obviously much quicker. We have a list of 500 or 600 counterparties - be it custodians, prime brokers or fund administrators - who we are connected to, and from whom we can extract data. Once we have the data, we configure and normalise it to generate a filing through our global regulatory platform, IVP Raptor.”

Viteos Fund Services has adopted a similar approach. It imports data files on behalf of clients from multiple sources. “We analyse and then map data onto the platform and, in effect, select inputs for Form PF, CPO-PQR and Annex IV,” explains Jonathan White, head of business development at Viteos Fund Services in New York. “We also provide a completed filing to the manager who ultimately approves it, and has during preparation already reviewed each question intimately. Fund administrators can handle about 80 per cent of the regulatory reporting requirements, but managers perform the role of project manager, source data and co-ordinate approvals. From our research among clients, we know that 67 per cent of managers outsource the filing to a provider other than their administrator to relieve the co-ordination burden and have experts handle the process. The importance of an accurate regulatory report lies in seamlessly imported data as the foundation, and from there a manager can confidently input into the regulatory reports, and perform varying calculations across reports. It is essential to have excellent technology to overcome both the operational and technical challenges when reporting.”

The Regulatory Enterprise Risk Management (RegERM) service provided by ConceptOne also makes use of a data aggregation process designed to enable managers to report accurately and consistently across multiple regulations. RegERM collects all of the necessary data from funds and their counterparts and aggregates it into the formats required by the different forms and regulators. Gary Kaminsky, managing director for global regulatory and compliance, says ConceptOne works closely with the service providers to a fund to source and deliver the data required by regulators, tailoring it to their specific demands.

Some specific demands are easier to meet through outsourcing than others. There is a more than sufficient number of technology vendors and fund administrators willing to service fund managers wanting to deliver Forms PF and CPO-PQR, Annex IV and FATCA. There is rather fewer offering Open Protocol, Solvency II and European trade repository reporting as well. “We do not provide our clients with Open Protocol reporting,” says one fund administrator. “There simply has not been the demand, although it is something we are exploring down the line.”

Solvency II services are even harder to find, yet the nature of the data make it unusually important. Solvency II stipulates that insurers hold capital equivalent to 49 per cent of the market value of any hedge or private equity investment they hold. But if the managers of those investments are able to supply regular position-level data, or report pre-calculated, aggregated ratios on the level of market risk in equities, rates, foreign exchange and real estate, their insurance investors will be subject to a much lower capital charge.

“The overwhelming majority of service providers have yet to implement Solvency II reporting tools for their clients,” explains Carsten Kunkel, manager of the regulatory and compliance group at SimCorp. “We are positioning ourselves to help clients report under Solvency II, but a number of fund administrators and technology vendors have been prioritising other regulatory issues such as the Alternative Investment Fund Managers Directive (AIFMD) and the European Market Infrastructure Regulation (EMIR). This is because these rules are imminent while Solvency II is not due to be implemented for some time.”

Solvency II is indeed scheduled for launch in 2016, which is much too far away for any service provider to be considering an in-sourcing service just yet. The reporting of exchange-traded and OTC derivatives under EMIR, by contrast, has become an object-lesson in maladroit and premature regulatory demands as managers and their service providers struggle to pair and match trades without concrete regulatory guidance. This was less of a problem for fund managers in the United States, where the regulators allowed managers to leave the work to the sell-side.

In Europe, by contrast, managers were expected to report as well. The largest managers opted early on to delegate the job to their clearing brokers, which were eager to retain their business for broader reasons, but smaller managers were effectively told by their clearing brokers that they would have to self-report. “Service providers are willing to provide delegated reporting to clients but do so only reluctantly,” explains Robert Barnes, manager for regulation at the Futures Industry Association (FIA) in Europe, an organisation that represents the interests of firms trading derivatives. “This is due to the fact that they do not want to incur the liability of reporting inaccurate data. It is an argument frequently cited by clearing members.”

That understanding - that most managers would have to self-report, with clearing brokers looking after their favourite clients only - held until the last-minute decision by the European Commission to insist on the reporting of exchange-traded as well as OTC derivatives, in defiance of advice from the European Securities and Markets Authority (ESMA). An unseemly rush followed. Smaller sell-side and corporate users of futures and options that had previously expected to self-report sought desperately to delegate the work to a clearing broker.

Investment banks, most of them ill-prepared and reluctant to do the work, found themselves taking on reporting on behalf of clients with little or no experience of regulatory reporting. It is an open secret that the clearing brokers would like to ditch the delegated reporting clients they were forced to take on, and even some of those they were not. Which opens an important question for regulators as well as central counterparty clearing houses (CCPs): who will do the delegated reporting if it is not the clearing brokers?

One option is the middleware providers. Firms such as MarkitSERV already help fund managers comply with their reporting requirements in Australia, Singapore, Japan and the United States. Any middleware provider has by definition a digital record of the OTC derivative transactions of fund managers that use its confirmation and affirmation services. In other words, they have most of the necessary data ready to report. But data vendors might also have a role to play. Some, such as ConceptOne and SimCorp, are already helping managers reporting to trade repositories.

Fund administrators have proved less enthusiastic. SS&C GlobeOp is one of the few to be reporting derivatives trades to repositories on behalf of clients. The chaos that accompanied the start of derivative reporting in Europe in February 2014, caused largely by the failure of regulators to offer concrete guidance, has made it difficult for administrators to design services. “There has been limited definitive guidance on how firms should report and in the format they should report from ESMA,” says Robert Barnes. “Firms have therefore had to report to trade repositories based on a set of assumptions.”

If clearing brokers are reluctant to continue to provide delegated reporting services, the global custodians have never seen it as an opportunity. In the prelude to the start of derivative reporting in Europe, global fund managers and institutional investors with futures and options and swap portfolios were surprised to find that their global custodian was unable to help them. Only State Street and HSBC have expressed interest in providing a service. Other custodians argued that they were not obliged to do it, or lacked the expertise and experience, or avoided the issue by making the service prohibitively expensive.

At bottom, the issue in European derivative reporting is one of price (are managers prepared to pay a sufficient price to make it worthwhile providing the service?) and risk (who is to blame if inaccurate data is reported?). The two issues are of course related, and apply to any form of regulatory reporting. The short answer, which compliance experts never tire of pointing out, is that it is the fund manager who bears ultimate responsibility for the accuracy of the data provided to regulators. The trouble is, every banker and broker-dealer thinks that, when it comes to fines and other penalties, the regulators will ultimately reach into the deepest pocket. As recent events demonstrate, they have certainly developed a taste for it.