Market changes in the U.S. are causing a surge in trading activity, which is raising concerns about operational risks for asset managers. These fluctuations stem from rapid shifts in trade and tariff policies, leading to an increase in trading errors. Tim Sullivan, an expert in asset management at WTW, highlights the link between this market volatility and the rise in mistakes during trading.
Sullivan points out that during times of high trading activity, errors tend to increase. For instance, in 2020, the uncertainty brought on by the pandemic led to significant market swings and a spike in trading mistakes. These errors can range from simple data entry mistakes to missed deadlines or miscommunication about trade instructions.
Despite the variety of potential errors, many firms mistakenly believe their insurance will automatically cover these incidents. Sullivan emphasizes that this assumption is often misleading. The coverage depends on the specifics of the loss, the asset manager’s legal responsibilities, and the details of the insurance policy.
When it comes to insurance, Sullivan mentions three types of policies that asset managers typically consider for trade errors: Cost of Corrections, Errors and Omissions (E&O) liability, and Fund Directors and Officers (D&O)/E&O liability. The Cost of Corrections policy is designed to reimburse managers for losses they proactively address, while the E&O policy requires a formal claim from a third party to trigger coverage. In cases where a fund faces a claim due to a trading error, the Fund D&O/E&O policy may come into play.
To improve their chances of recovering from losses, asset managers should thoroughly review their insurance policies. Understanding the claim reporting requirements is crucial, as late reporting can complicate claims. Sullivan advises integrating insurance reporting procedures into the firm’s trade error manual to ensure timely communication.
Additionally, asset managers should clarify how their policies define trade errors. Some policies may have broad definitions, while others may be more restrictive. Knowing these details in advance can prevent unexpected issues later on.
Sullivan also mentions the potential for increased regulatory scrutiny. The Securities and Exchange Commission (SEC) may soon investigate how asset managers handle risk management and compliance during volatile periods. This could lead to claims under D&O/E&O policies, making it important for firms to understand their coverage in this area.
Overall, asset managers are encouraged to work closely with their insurance brokers to ensure they have the right coverage in place. By being proactive and informed, they can better protect themselves against the risks associated with trading errors in a fluctuating market.