Buy-Side Compliance Conundrum

Terry Flanagan

From the front office to the back, from listed products to OTC derivatives, compliance is part and parcel of a buy-side firm’s existence. The sweep of new regulations is such that no firm by itself can possibly ensure that its systems and procedures are fully compliant, and as a result, compliance technology is being delivered to them by outside providers, often as a managed service.

“A lot of firms just don’t have the staff to manage in-house systems, and as a result systems often go mismanaged,” Ed Fitzpatrick, vice president of managed services at Charles River, told Markets Media. “Many firms struggle to keep in house systems up to date. We find that upgrades happen infrequently, sometimes years, sometimes many years. With all the changes that are happening in the industry, it is important that systems, investment systems, are kept up to date.”

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.

“What we’re offering is a shrink wrapped version of our compliance system, where we’re combining the compliance software with day to day system management, plus a compliance advisory service that includes rule writing,” said Tom Driscoll, managing director at Charles River. “We’re helping the client to write the rules and ensure that the system is set up to monitor compliance properly.”

Virtually all of Charles River’s approximately 360 clients use its compliance system, Charles River Compliance, in conjunction with other modules in the Charles River Investment Management Solution, such as portfolio management and trading. “With CaaS, we’re taking the compliance module in the Charles River Investment Management Solution and we’re packaging it to be a cloud-based offering.”

On the OTC side, companies are dealing with requirements from multiple jurisdictions for execution, clearing, and reporting of swaps and other derivatives.

The regulations represent “a generational shift in how OTC derivatives are being traded,” Satya Pemmaraju, founder and CEO of Droit Financial Technologies, told Markets Media. “They’ve addressed every aspect of the trading process from origination all the way down to clearing and settlement.”

For end users some of the biggest problems “are to be sure that the dealers are actually trading compliantly and providing them all the information that they are required to provide on a pre-trade basis,” Pemmaraju said, “so that the end user is effectively exercising all their rights and optionalities inherent within the trading process.”

Droit’s primary product, called Adept, is a pre-trade “decision engine” that enforces global regulatory market rules, market structure rules, and internal institutional preferences and capabilities on the trading process for OTC derivatives. It includes an audit database that is used for compliance verification and compliance reports.

The second product, which is under now development with a particular client, is called Ferret. It is an OTC derivatives surveillance product for end-of-day market surveillance and trading surveillance reports specifically directed at compliance optimization.

“Buy-side users need to understand all the execution and clearing choices that a given product has with a given sell side firm so that they can understand whether that sell side firm can actually clear the product at a particular clearing platform,” said Pemmaraju.

Reporting of trades of OTC derivative trades sometimes is incumbent on the end user as well, especially in the European regulations.

“What is clear is there will be a substantial amount of extra work,” said Pemmaraju. “It’s not clear how much it’s going to be. Most importantly, it’s not the European regulations by themselves, but how they interact with the CFTC regulations and how they interact globally with other regulatory regimes that come about and, thus, this cannot be done in a manual fashion.”

Featured image via Pavel Ignatov/Dollar Photo Club

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