Mitigate Operational Risk in CLOs

How automation technology can help managers master the month-end process

Responsible for extensive due diligence, CLO fund managers face a number of demands that are often challenging for their middle and back office, especially at month-end. This is when the fiduciary trustee, who is responsible for oversight, receives updates on cash, holdings, ratings and positions along with data points such as WAL and WARF that must be reconciled with their tests.

Generally speaking, these tests proceed without much friction if the underlying data is accurate and reliable. However, the month-end process requires a massive amount of manual work behind the scenes, typically involving collaboration across teams using a combination of email and spreadsheets. The challenges encountered at month-end, which are exacerbated when managers have multiple CLOs, are leading many to seek an automated solution to help reduce operational risks.

This solution should be equipped to detect anomalies within reporting cycles, and it should also be able to integrate seamlessly with a variety of internal and external systems. Other features to look for in an automated solution include:

• AI/ML-Powered Reconciliation. Ideally, the reconciliation engine should be able to reconcile underlying holdings, cash balances, ratings, and transactions activities with the trustee. AI/ML is especially well suited to credit/loan instruments because it can recognize patterns, “learn” from user actions and increase match rates automatically, all of which improve efficiency significantly.
• Advanced Workflow Management. Centralized workflow management capabilities should make it easy for CLO fund managers to perform due diligence and track monthly/quarterly activities across all CLOs from a single perspective. Managers should also be able to assign tasks to teams automatically with escalating email notifications in case of delays. Workflows should be customizable and able to detect anomalies with a robust audit trail and multi-level signoffs.
• Embedded Trustee Communication. CLO fund managers should be able to communicate directly with trustees (via email) directly from a reconciliation break blotter. It should be simple to attach break sheets to these emails automatically as well as keep a full audit trail of communications.
• Comprehensive Integration. Automated solutions for CLOs need to integrate seamlessly with industry-leading systems for order management, portfolio management, and security and reference masters to view ratings, pricing, covenants, and benchmarks. This kind of integration is essential for a holistic view that expedites exception management and root cause analysis.

With the use of an automated solution designed specifically with CLOs in mind, managers can establish control over the challenging and chaotic month-end process, increase accuracy by identifying inconsistencies and improving compliance testing and strengthen confidence in due diligence for the middle and back office.

IVP Solutions for CLO Managers equips managers with the technology they need to shift away from using manual processes and spreadsheets to run their CLOs more efficiently. With the help of IVP, managers can make smarter investment decisions, streamline their processes, ensure compliance and reconcile trustee reports through the power of automation.

To learn more, please visit IVP Solutions for CLO Managers or contact sales@ivp.in.