Buy Side Assesses Pre-Trade Compliance

Terry Flanagan

Pre-trade compliance has become a major pain point for buy side firms as regulations, especially around OTC derivatives, place the front office directly in the line of fire.

“For managers that use leverage, are long/short, use forward settling instruments, utilize credit default swaps, interest rate swaps, and other types of derivatives, new regulations has challenged firms’ compliance programs as well as order management compliance systems,” said Steve Hedger, director of trading and investment operations at ClearArc Capital, formerly Fifth Third Asset Management.

“New regulations have not caused too much of a strain for long only equity buy-side managers that have order management systems with contemporary and sophisticated pre-trade compliance engines,” Hedger added.

The challenges have been and continue to be workflow-related when a pre-trade compliance rule has tripped, Hedger said. Some examples of items that firms now need to contemplate are improper calculations of exposure that could trip rules that require a firm to file as a commodity pool operator, and a decision to become a Swap Execution Facility, which greatly enhances record retention requirements.

These situations have not been traditionally covered with pre-trade compliance systems. “This is causing compliance and legal resources to expand to fill these types of gaps,” Hedger said. “I believe the industry is still trying to figure out many of the Dodd-Frank requirements, and technology providers are slightly behind the curve providing solutions to help efficiently monitor compliance boundaries.”

A poll of compliance professionals conducted by compliance technology provider NICE Actimize found that only 48% of respondents believe that the financial institutions they work for have a strong culture of compliance.

“Increasingly, regulators are looking for accountability at both institutional and compliance officer levels,” said Joe Friscia, president of NICE Actimize, in a statement. “The current enforcement environment is demanding more of AML risk management efforts pushing compliance higher on the business agenda.”

Charles River, a front- and middle-office investment management software provider, has launched Charles River Compliance as a Service (Charles River CaaS), a cloud-based offering for asset managers that integrates software, data, and services in a hosted environment.

“There’s s constant stream of new regulations coming at us and our clients from all directions, in all parts of the world,” Ed Fitzpatrick, vice president of managed services at Charles River, told Markets Media. “Some firms, like hedge funds, that were once fairly lightly regulated, now are subject to increasing regulatory oversight. Oftentimes they don’t have a compliance system at all, and they are scrambling to get one.”

Fitzpatrick added, “When it comes to the whole construct of funds of funds or pension funds, these firms lack a holistic view of all their holdings across the various systems. They may use multiple or proprietary systems in house. With subadvised funds, they’re using other systems and they do not have a holistic view.”

Charles River tries to watch all of the regulations, and together works with clients to keep rules up to date, Fitzpatrick said.

“There are regulations, and then there’s the interpretations of them. Some are cut and dried, others are a little gray, so some client interpretation is involved,” he said. “We’ll share with them what we see across our client base, and make suggestions to them. Once the client has decided on their particular interpretation, we will go ahead.”

Featured image via Dollar Photo Club

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