By Daniele Roberto Tresoldi, Global Head of Securities Services Hub at Adepa
Within the landscape of asset management, mastering the intricacies of handling sanctioned securities is paramount, especially within jurisdictions like Luxembourg known for stringent regulatory standards.
Successfully navigating this terrain requires asset management firms to establish robust protocols for detecting and updating sanctioned securities lists, taking into account sanctions issued by various authorities across different jurisdictions.
Detecting and Updating Sanctioned Securities
The cornerstone of proactive risk management lies in the meticulous detection and continuous updating of sanctioned securities lists. Asset managers must implement sophisticated screening mechanisms capable of parsing through multiple layers of sanctions issued by diverse authorities. This ensures comprehensive coverage and timely updates, reducing the risk of non-compliance.
Managing Liquidity Risks
Once identified, sanctioned securities present liquidity challenges. Illiquid assets can jeopardize portfolio performance, prompting asset managers to consider adjusting prices to reflect their true market value accurately. This proactive approach helps mitigate potential losses and ensures prudent risk management practices.
The Divestment Challenge
In cases where sanctioned securities lack liquidity persistently, investment managers could face several types of issues, being possibly complex to sell the security for legal restrictions, counterparties being reluctant for reputational risk, settlement delays. It is also possible the counterparties would trade at pricing conditions putting at risk the fund profitability. Third-party management companies and the Directors of the funds may face the challenge of persuading investment managers to divest these positions. Effective negotiation skills and a deep understanding of market dynamics are essential in convincing stakeholders of the necessity of such actions.
Navigating Accounting Complexities
From an accounting perspective, sanctioned securities may deviate from standard settlement circuits, complicating the valuation process. Asset managers must navigate these complexities diligently to ensure accurate financial reporting and compliance with regulatory requirements.
Coordinating with Custodian Banks
Moreover, custodian banks may place funds related to sanctioned securities into restricted accounts, adding another layer of complexity to asset management operations. This necessitates seamless coordination between asset managers and custodians to ensure smooth fund management while adhering to regulatory restrictions.
Auditor Scrutiny and Compliance
Auditors play a pivotal role in verifying the fair valuation of portfolios containing sanctioned securities. Asset managers must provide robust evidence and transparent documentation to satisfy auditor scrutiny and demonstrate compliance with accounting standards and regulatory mandates.
Segregation of Sanctioned Securities
To address these challenges, asset managers may opt to segregate sanctioned securities into a side pocket compartment. This strategic move allows for the isolation of high-risk assets, protecting the main portfolio from potential adverse effects while providing greater transparency and control over risk exposure.
In conclusion, managing sanctioned securities in an asset management company in Luxembourg requires a comprehensive approach that encompasses rigorous procedures for detecting and updating sanctioned securities lists, diligent risk management practices, and strategic decision-making. By establishing robust protocols to identify and manage sanctioned securities effectively, asset managers can navigate regulatory complexities with confidence, safeguarding investor interests, and maintaining compliance in this dynamic financial landscape.
With years of experience navigating such complexities, Adepa stands as the trusted partner equipped to handle the intricacies of managing sanctioned securities. As a seasoned professional in the field, Adepa ensures clients receive the utmost care and expertise in safeguarding their assets amidst regulatory challenges.
Contact Adepa today For more information on how Adepa can assist with managing sanctioned securities and navigating regulatory complexities. We are here to provide tailored solutions to meet your specific needs and challenges.