The back-office recordkeeping ecosystem has several black boxes that provide data to other systems and receive data from other systems. The frequency of this data exchange will vary from intra-day, daily and less frequent. Trust Accounting, which is a critical integration, is often forgotten when looking at recordkeeping transaction processing requirements. Call centres, taxation, client reporting and even actuarial remain in the forefront.

Let us take a closer look at recordkeeping from the trust accounting perspective and the questions that must be considered:

Trade Placement:

• What attributes of the transaction will drive downstream trust accounting reporting?
• What happens when a transaction is reversed?
• What if the trade is placed for a fund of fund, how is this managed from both a trust and custody perspective?

Trade Settlement:

• What is the trade settlement cycle and is it the same as money movement settlement?
• Is it manually settled or automatically settled for guaranteed money?

Trade Deductions

• What are the trade deductions e.g., upfront advisor compensation, early redemption fees?
• How are the deductions and final recipient managed?
• Is the final recipient the fund manufacturer, the fund itself or a 3rd party?

Error Corrections

• Has the original trade been paid out?
• When is the correction made in the ‘Trust life cycle’?

Fund Setup

• Is the fund custody managed internal or externally?
• Is there a mapping key from a trust accounting system that must be part of the recordkeeping system?
• How are subscription and redemption data consolidated for a fund?
• How is the underlying fund identified on the system?

Money Movement

• How is money being moved?
• What payment methods e.g., EFT, bank wires supported by the Trust Accounting System?
• How is money moved to external parties e.g., custodians, distributors?
• How is the trade and money linked to ensure duplicate payments are not issued for the same trade?

You may be thinking to yourself. Why talk about this now? There are a few industry factors that must bring trust accounting to the forefront of solutioning. Otherwise, we will go live with high-risk manual controls to manage the lack of end-to-end transactional flows with possible financial impact.

Move to T+1: The industry is anticipated to move to Trade Date Plus One (T+1) settlement in early 2024. This will impact custody, capital requirements, and liquidity to name a few. However, it will also impact transaction reporting and money movement requirements into Trust Accounting Systems.

Total cost reporting for investment funds and segregated funds: This means additional fees previously handled as part of Fund accounting will now need to be deducted or reimbursed at the investor’s account/policy level. We must consider how will such fees be identified (i.e., early redemption fees are collected from the investor and often paid back into fund custody) and allocated into the appropriate custody/General Ledger account.

ISO 20022 payment standard adoption: Financial institutions prefer ISO 20022 standards for payments, since it offers detailed information about payments, resulting in less manual intervention and processing risk. Some Trust Accounting systems have a money movement component that connect into banking systems while others are a ‘general ledger’ system that tracks the money allocations and then produce a file (EFT or Wire) that is used to move money both internally and externally. Regardless, as respective banks slowly transition to create an agile core banking platform then the ISO 20022 transition will be required by Trust Accounting System with direct integration or payment file generation logic.

Let us look at an example using unbundled fees, a common total cost reporting need. In the case of unbundled fees, the fees are excluded from the management expense ratio of the fund and are deducted as direct fees on investor accounts. The fees often include:

1. Management fees payable by the investor to the underlying fund
2. Advisor fees payable by the investor to the advisor
3. Admin fees payable by the investor to the fund manufacturer

Recordkeeping systems would be designed to calculate the fees based on various formulas that vary by carrier or fund manufacturer and the transaction will either see three or a single deduction with downstream client reporting. However, from a trust accounting perspective the management fee and admin fee may need to be allocated back to the underlying fund as part of custody reporting or a master trust account.

Finally, the advisor fees would need to be allocated to a manufacturer level Trust account for advisor compensation payments. Is it a misconception that Trust accounting requirements cannot be standardized? Does this stem from trust accounting requirements being often handled outside the recordkeeping system? A common base could be created at the recordkeeping level (source transactional data) with configurable mapping to align for differences, for e.g., Trust accounting systems, retail/institution product lines, mixed custody models.

In summary, it is imperative that trust accounting needs be at the forefront when working with your recordkeeping requirements related to transaction processing, money movement, fees & compensation models to reduce organizational risk in recordkeeping, custody, and trust accounting services.

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