12:20 PM
Matt Grinnell
Matt Grinnell
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How Buy Side Compliance Operations Are Evolving

As the consequences of regulatory violations become more severe, the need for better relationships between traders and their compliance officers is stronger than ever.

As hedge funds become increasingly regulated, the question of how best to achieve effective compliance lurks ominously ahead. This is a challenge that institutional asset managers have had to address for several years, and their path to compliance is strewn with stories of both overwhelming success and debilitating failure. As a result, these seasoned veterans have plenty of examples and experience to offer hedge funds when it comes to developing compliance best practices.

What has become clear is that trading compliance is more than simply a technological challenge. Trading compliance systems are readily available to deliver highly sophisticated pre and post-trade reviews, adaptable rules engines and analyses of trades across all asset classes, including derivatives. But these systems deliver their best when a true culture of compliance is established.

[For more on why good compliance systems are going to cost the buy side dearly.]

This is the real challenge. Where a culture of compliance exists, traders and compliance officers enjoy a highly collaborative and consultative partnership. The difficulty is, of course, that compliance officers and traders do not always enjoy that type of relationship. In many cases, they are politely distant at best and actively antagonistic at worst. Compliance managers are often regarded as the people who like to say 'no': an unnecessary impediment to the process of generating alpha. At the same time, compliance officers sometimes see traders as unresponsive and uncooperative barriers to their efforts to keep the firm within the limits of the law.

As institutional fund managers have proven, developing this relationship is essential to effective compliance management and, as the consequences of regulatory breaches become more severe, paramount to ongoing profitability. Bridging the gap of understanding between the two departments is critical if compliance is to be achieved in a way that minimizes costs but continues to maximize profits.

To develop a culture of compliance successfully, the heads of both departments need to be aware of each other's needs and then build those needs into their own operations. A partnership in which compliance officers understand all facets of the trading process, and in which traders factor in the goals of their colleagues in compliance is the foundation of a functional compliance environment. Where that partnership exists, traders are no longer faceless, nameless, and distinctly separate, but instead become real people with real personalities; and it is understood that they have their own individual goals as well as corporate aims.

A critical element of that partnership is ensuring that traders understand and acknowledge the requirements of and potential impact of relevant legislation. Aside from keeping their traders up to date with the unfolding developments and implementations of the Dodd-Frank Act, there are a number of requirements of which traders need to be aware. As an example, everyone on the trading desk needs to know the differences between reporting and disclosure requirements under schedule 13g and schedule 13d of the 1934 Securities Act and in which circumstances each should be applied.

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