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DORA Red Flags: What is a Function?

Standard Template B_06.01: Functions identification of the ITS Register of Information, requires a Financial Entity to uniquely identify each combination of a Legal Entity (B_06.01.0040), License Activity (B_06.01.0030) and Function Name (B_05.01.0020) by creating a Function Identifier (B_06.01.0010) with a unique key in the form F1, F2, F3...Fn.


The keys F1, F2, F3...Fn are not real world Functional Identifiers. They are a value you create that needs to be mapped and maintained to the real world identification of legal entities, license activities and functions to ensure that the interdependencies between Functions and ICT Services can be risk assessed and maintained over time.

Recital (8) of ITS ROI identifies 4 keys " (i) the reference number of the contractual arrangement between the financial entity signing that arrangement and the direct ICT third-party service provider, (ii) an appropriate identifier of financial entities and ICT third-party service providers, (iii) the function identifier, and (iv) the type of ICT services."

The key you create in B_06.01.0020 is used in column B_02.02.0050 of Standard Template B_02.02: Contractual Arrangements - Specific Information with the Contract Key B_02.02.0010, the Legal Entity key and the Type of ICT Service Key to record an interdependency for a Financial Entity that is making use of ICT Service.


Real World Functions

There is no direct relationship between a license activity and a function, both belong to a Legal Entity.


A Regulatory authorisation enables you to perform licensed activities. A legal entity may obtain several Regulations authorisations, allowing it to undertake different licensed activities. It may also perform activities that do not require a Regulatory authorisation, for example, many Financial Entities provide ICT Services. Each legal entity will allocate activities to functions, in line with the requirements of its Operating Model, to deliver products and services to customers.

Financial entities shall identify and provide information on all functions of the financial entity according to the financial entity’s internal organisation supported by an ICT service provided by ICT third-party service providers.

Organisation design and the creation of real-world functions is driven by many different factors - products, scale, resources, jurisdiction, delivery model, expertise etc. There are known activities, that logically are fit together as functions.


Compliance By Design has built an Digital Operating Model for a Fund Management Company, that identifies 11 functional areas that are present in every fund. We see two groups; Operate the Fund and Report Fund Results with 11 functional areas covering the lifecycle of activities. Included in brackets below is an organisation name often associated with each functional area.


Operate the Fund

  • SETUP Fund [Legal]

  • RAISE Capital [Investor Relations]

  • INVEST Capital [Investment Management]

  • SETTLE Investments [Custodian]

  • CALCULATE Valuations [Fund Accounting]


Report Fund Results

  • REVIEW Results [Management]

  • REVIEW Outcomes [Governance]

  • REPORT Financial Results [Financial Reporting]

  • REPORT Tax Results [Tax Reporting]

  • REPORT Regulatory Results [Regulatory Reporting]

  • CLOSE Fund [Liquidator]


What about Compliance? Where is Fund Distribution? Risk management is fairly critical to what our fund does? Does it include Investment Operations? As an active fund, Research is key, how is that represented? We have lots of people doing Reconciliations? Pre-trade Compliance is that part of Investment Management, Management or Regulatory Reporting?

All good questions, a number of the functional areas have multiple functions, Raise Capital would include Fund Distribution and Investor Relations.

It is important to note that some Functions such as Compliance distribute activities to other the first line of defense functions - pre-trade compliance and anti-money laundering, for example.


Licensed Activities

ANNEX II of the ITS ROI identifies the list of activities by type of entity. It is a pointer, to the legal text in other Directives and Regulations where you can find the list of licensed activities.

ANNEX II has 24 entries for Type of Entity and 21 references to other Directives and Regulations.

The 12th entry in the list, (l) Managers of Alternative Investment Funds, points you to ANNEX I of Directive [EU 2011/61], on Alternative Investment Fund Managers (AIFM), a type of Fund Management Company.


ANNEX I of AIFM identifies Investment Management functions that an AIFM must perform when managing an Alternative Investment Fund (AIF) and other functions that an AIFM can perform.


For the DORA ROI, a list with 128 codes has been created, LIST0601020, to consolidate Licensed Activities, across all Financial Entities. The DORA code for licensed activities for AIFMs has been added below.


(1) Investment Management Functions

  • (a) Portfolio Management [eba_TA:x136]

  • (b) Risk Management [eba_TA:x260]


(2) Other Functions

There are types of other Functions:

  • (a) Administration

  • (b) Marketing [eba_TA:x272]

  • (c) Activities related to the Assets of the AIF


Administration further breaks down into nine activities:

  • (i) Legal and fund management accounting services [eba_TA:x261]

  • (ii) Customer inquiries [eba_TA:x262]

  • (iii) Valuation and pricing including tax returns [eba_TA:x263]

  • (iv) Regulatory compliance monitoring [eba_TA:x264]

  • (v) Maintenance of unit/shareholder register [eba_TA:x265]

  • (vi) Distribution of income [eba_TA:x270]

  • (vii) Unit/shares issue and redemptions [eba_TA:x266]

  • (viii) Contract settlement, including certificate dispatch [eba_TA:x269]

  • (ix) Record keeping [eba_TA:x271]


License Activities represent the Regulators view of the world. They are incomplete, often general and need to be overlaid onto your Operating Model to connect them to what happens in the real world.

Overlaying is key to Compliance Lineage as it allows you maintain an Operating Model that acts as a single source of truth for your real world operations and then connect any number of different requirements contained in Regulations, Policy, ISO Frameworks, Audit Findings, Risk Assessment etc, to enrich the context of controls you have designed into Standard Operating Procedures.

To illustrate this, let’s look at the RAISE Capital functional area. There are two main functions, Fund Distribution and Investors Relations (as known as Transfer Agency).


Fund Distribution

The Fund Distribution function undertakes sales and marketing activities for a fund by plugging it into established channels to market – allocators, distribution agents, online fund platforms etc.


An important part of this function is to ensure that the AIFM has a control framework to ensure that marketing materials presented to investors about a fund comply with Regulations, including local market requirements as well as the fund’s Prospectus. This is to ensure consistency in the way a fund is marketed by Distribution Agents operating in each of the 27 EU jurisdictions.


What might a Function Identifier (B_06.01.0010) to comply with the requirements of DORA ITS ROI for Fund Distribution look like:


B_06.01.0010: Function Identifier - F1

  • B_06.01.0020: Licensed Activity - Marketing [eba_TA:x272]

  • B_06.01.0030: Function Name - Fund Distribution

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F2

  • B_06.01.0020: Licensed Activity - Customer inquiries [eba_TA:x262]

  • B_06.01.0030: Function Name - Fund Distribution

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F3

  • B_06.01.0020: Licensed Activity - Regulatory compliance monitoring [eba_TA:x264]

  • B_06.01.0030: Function Name - Fund Distribution

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F4

  • B_06.01.0020: Licensed Activity - Record keeping [eba_TA:x271]

  • B_06.01.0030: Function Name - Fund Distribution

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


Investor Relations

The primary role performed by Investor Relations is to maintain the Register of Investors based on the Subscription Agreement.


For each dealing date, Investor Relations will calculate the holding for investors subscribing to a fund, and the payment due to an Investor redeeming a holding, based on the Net Asset Value (NAV) of the Share Class. What might the Function Identifiers for Investor Relations, based on the requirements of DORA, look like:


B_06.01.0010: Function Identifier - F5

  • B_06.01.0020: Licensed Activity - Regulatory compliance monitoring [eba_TA:x264]

  • B_06.01.0030: Function Name - Investor Relations

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F6

  • B_06.01.0020: Licensed Activity - Maintenance of unit/shareholder register [eba_TA:x265]

  • B_06.01.0030: Function Name - Investor Relations

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F7

  • B_06.01.0020: Licensed Activity - Distribution of income [eba_TA:x270]

  • B_06.01.0030: Function Name - Investor Relations

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F8

  • B_06.01.0020: Licensed Activity - Unit/shares issue and redemptions [eba_TA:x266]

  • B_06.01.0030: Function Name - Investor Relations

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


B_06.01.0010: Function Identifier - F9

  • B_06.01.0020: Licensed Activity - Record keeping [eba_TA:x271]

  • B_06.01.0030: Function Name - Investor Relations

  • B_06.01.0040: Legal Entity Identifier - XXXXX00XX0X0XXXXXX01


There are clear bounders between real world functions, it is easy to identify who belongs to Fund Distribution and Investor Relations and what system they use to automate the activities to deliver products and services to customers.

Real world functions and the activities performed are important as they align with people and systems.

A license activity called Record Keeping [eba_TA:x271] is generic and has little real world meaning, every function must perform some level of record keeping. It is the reason why you are keeping the records, that is important in the real world.


Multiple Authorisations

In the example above we have looked at two Functions belonging to one Functional Area for a Fund Management Company.


Fund Management Company - Guidance (CP86) issued by the Central Bank of Ireland in December 2016, applies to 3 different types of structure, a UCITS Management Company (UCITS ManCo), an Alternative Investment Fund Manager (AIFM) and a Self Managed Investment Company (SMIC). A Super ManCo, has two authorisations UCITS ManCo and AIFM in one Fund Service Provider legal entity. In recent years, MiFID authorisations have also been added by some Fund Management Companies.


In our weekly call, Compliance Professionals from each type of Financial Entity, discuss the complexities of DORA with representatives from UCITS ManCos, AIFMs, Super ManCos, SMICs and MiFID firms (Banking, Pensions, Payments, Insurance are also represented).

For Fund Management Companies, the consensus is that there between 18 to 22 Functions. That seems to make sense given the 11 Functional Areas identified above.

The expectation is that Standard Template B_06.01: Functions identification will have between 50 and 100 Function Identifiers for a Fund Management Company (with a single legal entity) when Licensed Activities are added. Each Function Identifier then needs to be connected with the Contracts Identifiers and associated ICT Services in Standard Template B_02.02: Contractual Arrangements - Specific Information.


Conclusion

How you identify real world functions, will significantly impact the number of entries in Standard Template B_06.01: Functions identification which is a multiplier for Standard Template B_02.02: Contractual Arrangements - Specific Information.

The Fund Digital Operating Model provides a standardised set of real-world functions aligned to the lifecycle of a fund and linked to Licensed Activities. It is available as part of the Digital COE – Operational Resilience.

Distributed functions like Risk and Compliance can be viewed as share services, a Risk function and a Compliance function or as functions in other Functional Areas, Investment Management for example.


Keep in mind that after your first submission, you will have to maintain all of the data and that your Competent Authority will have lots of data from different UCITS ManCos, AIFMs, SMICs, Super ManCos etc to compare your submission against.

 
 
 

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