Trade and portfolio compliance systems are a mature technology market. While the selection process is often driven by business requirements for the trader and portfolio manager, today the compliance team has a voice — and veto power — to fulfill the needs of the compliance program. But there are risks.
A few key risks include the volume of regulatory change, keeping abreast of multi-jurisdictional regulations while businesses grow and introduce new products, and the accuracy of rule interpretation. Data quality and integration, and rule design, testing and ongoing validation also complicate the mix. Changes, driven by clients, to investment policy statements also come into the mix. Behind the scenes, the compliance team wrestles to complete these tasks accurately and quickly.
Vendors are responding with a raft of new tools and services. These include active execution checks and native advanced risk analytics, such as value-at-risk. Active trade execution checks, also referred to as “in trade” compliance, are performed on active, open orders at various stages of the trade process, outside of pre- and post-trade checks. Traders may designate, for example, compliance checks to run at the point of trade release, at an interim point of the trade progression, or at the point of trade allocation. A large trade block can take several days to complete. “At the point of allocation” compliance checks run as allocations occur.
As a block trade progresses, selected compliance rules continue to check for imbalances that arise, perhaps for reasons outside of the trade in question. Currently, firms may run intraday compliance checks by which traders determine a set point in time for checks, such as at 2 p.m. each day.
“Native advanced risk analytics” refers to risk calculations done within the compliance system environment. An example is value-at-risk, a European requirement in the Markets in Financial Instruments Directive II (MiFID II) for those that select this method. Because some international regulators strive for uniform requirements, firms may consider adoption in other jurisdictions. Nonetheless, a broader audience is trending toward the systematic calculation of advanced risk measures on investment portfolios, particularly in the middle-office risk oversight role. For this reason, there’s logic to the calculation becoming a standard investment process check. Where native capabilities are not present in the compliance solution, vendors establish integrations with third-party risk solutions or uploads from the client’s warehouse.
Mobility has everyone abuzz. One of the key uses for a mobile solution is in support of workflow continuity. A compliance officer accesses the work queue remotely to monitor pending trades or to check activity metrics during the day. The heavy lifting is left for the office, but on-the-go staffers find this quick access advantageous. The compliance officer wants to be the road sign on the highway, not the traffic jam.
Looking into the not-too-distant future, European Union regulatory requirements are hastening trade surveillance for asset managers. MiFID II, due for implementation in 2016, requires investment firms to monitor market abuse and insider trading. Other surveillance-supported activities include evaluating traders or portfolio managers to prevent practices such as window dressing (making the portfolio look good at quarter-end), manipulative trading such as spoofing (creating orders to influence others’ actions, then canceling the orders before execution), or late trading (after a net asset value calculation). Surveillance involves analyzing fast-moving data flows, possibly across trading systems, and frequently this means across asset classes.
Aite Group’s research on dedicated trade surveillance solutions reports that 15 percent of compliance clients are now asset management firms. Today’s independent surveillance systems-mature within the sellside community-utilize real-time, complex computer algorithms to flag suspicious behavior. Sophisticated solutions integrate multiple data sources including transaction data, video and phone communications, email, instant messaging and even unstructured data.
Could the asset manager’s trade compliance system evolve to surveillance through functionality expansion or partnership? IT vendors hold the key to creating a more comprehensive compliance technology framework, which is a hybrid of static and dynamic data. Trade and portfolio compliance and surveillance systems are both mature tech categories. On a single platform, they could provide compliance staff with a comprehensive and immediate view into overall trading compliance and practices.
Vendors finding new ways to support clients will gain favor. Facilitating workflow is paramount, from client self-sufficiency in rule coding, to data extracts in clear usable form, to expanded support and services. In a market where cost takeout reigns, regulatory matters dominate, and client competitions rely on brand, results and operational excellence, business decisions on system selection will point to the shortest distance to the end goal and the vendor that helps get there.
Denise Valentine is senior analyst/consultant for Aite Group.