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Grexit - A Practical Approach to Operational Impacts

With the Greek situation looking to reach its denouement, the one thing which is certain is that the impact on Greece and the Greek economy will be severe and drawn out with a cycle of inflation and currency devaluation depressing asset values while at the same time increasing the burden of that part of existing external debt which hasn’t been written off.

At the time of writing, there has been no definitive decision that Greece has exited the Euro however with every day the likelihood increases. The process of implementing a new currency and the practicalities of redenomination of securities are themselves well understood. However the wider impacts are likely to persist into the future. Questions around impact of the new currency on contracts denominated in euros between Greek and non-Greek entities but governed by laws of other countries are unlikely to be resolved quickly.

Quite apart from the problems which will confront investment professionals directly, the knock on effects of the Greek exit to the Investment Management community at an operational level have to be dealt with quickly and effectively; Clients and Fund Managers alike requiring the presentation of the impact on their assets ad hoc; Regulators requiring clarity in and timeliness of reporting. Despite not being afforded the luxury of detailed preparation and wholesale industry focus on the operational impacts we were at the inception of the common currency at the end of the 1990’s, the relatively gradual move has given the industry time to reflect on the necessary actions.

Grexit bottles

In the event of Grexit, the changes to support the new reality need to be implemented quickly and efficiently. There will be a cacophony of competing informational demands made on all the actors within the industry which must be managed in a coherent, ordered and yet dynamic manner. Analysis paralysis is not an option.

The Grexit project team will need to comprise of representatives covering all impacted business areas along with IT resources and data management representatives. Their first task must be quickly to analyse the scope and shape of the project, providing clarity on the impacts to systems and processes across front, middle and back offices. The obvious impact is the creation of a new system currency across all impacted platforms along with the redenomination of Greek securities. However, clearly the ramifications are more far reaching.

The project team will need to assess impacts to their own systems and processes. The issues to be dealt with will include the ease with which a new currency can be set up in systems and how accounting systems will treat assets and portfolios in the new currency. Where systems limitations may require new portfolios to be set up, this will need to be communicated and coordinated with other business areas in order that such changes are controlled and mirrored. Impacts on information presented to clients are of paramount importance. Assessment will need to be made of the impacts on such areas as currency history and classifications pertaining to affected securities. If a decision is taken by the Investment Manager to provide a dual currency presentation for impacted securities and transactions, should the situation pertaining to individual securities lack clarity for example, an assessment of the systems impact and timelines will need to be developed.

Grexit - A Practical Approach to Operational Impacts

The team will need to ensure that they are in constant communication with their 3rd party system, data and service providers to understand the timetables to which they are working to implement changes and ensure systems changes are synchronised as far as possible. If the events of September 2008 are a guide, the providers themselves will likely face a huge increase in informational requests from the Investment Management community and a controlled and timely response mechanism will be vital.

Euro notes

With regard to data, the devil will be in the detail and as we saw back around 2000, such issues as rounding differences resulting from security redenomination will crop up. Data providers are likely to employ different approaches and timelines meaning that scrubbing of securities data will require considerable attention. Many providers will have plans in place and these will need to be gathered and assimilated quickly by the client project teams. Furthermore, changes to both inbound and outbound interfaces to incorporate the new currency will need to be communicated to affected internal and external stakeholders and implementation controlled in a disciplined manner.

Where solutions cannot be delivered in as timely a way as required, analysis will need to be performed to assess gaps and develop pragmatic solutions.

As we enter yet another period of uncertainty, experience and cool heads will once again be required to steer the ship to safety. If Grexit does happen, the steps required to mitigate the operational impacts are clear, even if the investment impacts remain uncertain.

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