Buy-Side Cash Wire Movements: Current Practices and Meeting the Scrutiny of Audit and Control Reviews
September 1, 2010
On a daily basis, many buy-side firms are required to execute cash wire money movements for a variety of routine operations and accounting needs. Given the multitude of portfolios, broker accounts, counterparties and prime brokers, the process of initiating, approving, instructing and accounting for these transactions can be highly fragmented and manual. This is a cause for concern from both an internal control perspective as well as operating efficiency.
IntegriDATA conducted an independent survey on cash wire movement practices to assist industry participants in benchmarking themselves as well as determining best practices. The respondents included Operations Managers and C-level executives of buy-side investment firms. The respondents’ firms varied in size and were grouped into AUM categories (under $1 billion; $1 to $5 billion; $6 to $10 billion; $11 to $25 billion and over $25 billion).
The overall findings are as follows:
- Approval Process – 25% of the overall respondents require only one level of approval for authorizing wire movements
- Maintenance of Standing Instructions – 36% do not have a central repository; while 32% store their data in MS Word /PDF forms and Excel
- Spending on Technology – overall spending for 2010 vs. 2009 will increase for 12% of the firms
- Adequacy of Internal Controls – over 90% achieve acceptable level of internal controls; this implies a high level of manual effort, due to the process complexity and systems limitations
Current State of Technology & Spending****
The survey revealed that 64% of the total firms have some type of a central repository that holds some or all of their standing wire instructions. Of these, 26% utilize 3rd party software; 39% have a propriety database; and 32% store their data in MS Word /PDF forms and Excel. 70% of firms which use MS Word /PDF forms and Excel have AUM of $5 billion and under.
With respect to investment in technology, 47% of all firms have not made any life-to-date investments; of which 61% are firms with AUM of $5 billion or less. 76% of all firms anticipated that the spending for 2010 vs. 2009 will be the same, with 12% increasing and 12% decreasing their investment. Of the smaller firms (AUM of $5 billion or less) with 2009 and 2010 technology budgets, spending for those firms will increase for 10% and remain the same for 65%.
Internal Control, Risk Management and Reporting
From an internal control perspective, the two aspects of the overall process, which are considered highly sensitive, are approvals and maintenance of standing instructions. Of particular note was that 25% of the respondents had only one level of approval for wire movements; 73% of these were firms with AUM of $5 billion and under. As for standing instructions, 36% of the firms did not have a central repository to store these, and of the firms that stated they had a repository, many reported using Excel and MS Word for this purpose. Given the potential for improprieties and/or manual errors, these statistics are of major concern because many of these firms will be facing more rigorous control and due diligence reviews in the future.
A relatively small number of firms indicated providing daily management reports. The numbers were as follows:
- Standing Instructions Set-up & Updated (16%)
- Wire Movement & Summary Metrics (25%)
- Wire Request & Cash Movement Reconciliation (29%)
Contradictory to the above, an overwhelming majority (over 90%) of the firms stated an adequate level of internal controls (Very Strong, Strong or Average). Given the process complexity and the potential financial consequences associated with errors, it is likely that highly skilled knowledge workers are used to overcome the inherent data and systems limitations.
Major Pain Points in Cash Wire Movement Process
The top pain points identified were as follows:
- Creation of Wire Movement Instructions (44%)
- Integration with Internal Systems (38%)
- E-mail/Fax Instructions (38%)
It is important to note that 46% of respondents use e-mail or fax to some degree to instruct their wire movements. Of these, 69% are firms with AUM of $5 billion or less. 55% of all firms do not have the capability to electronically update their internal downstream systems (e.g. General Ledger) with wire transactions; 28% do not track confirmations of receipt of wire movement instructions.
Functionality Most Desired****
In view of the challenges, firms are seeking greater automation in the cash wire movement process. Thus certain functionalities of the specialized systems are in the spotlight. According to the survey, the following four functionalities were ranked as the most vital when choosing a system:
- Audit Trails (72%)
- Standing Instructions Management (63%)
- Integration with Internal Systems (63%)
- Daily Wire Workflow (56%)
Over 50% of the survey respondents indicated instructing wire movements for high-volume/high-frequency investment related activities such as Bank Debt, Collateral Calls, Swap Settlements and FX Settlements; over 40% of the respondents stated making intra-fund transfers. For each case, having the information and systems available is imperative in order to handle increasing volumes in a controlled manner. Currently, end to end automation in the cash wiring process is rare. However, many have come to realize that in order to meet the scrutiny of audit and control reviews (e.g. SAS 70) the level of automation needs to be increased across all areas of the process.