How important is compliance to a company such as First Quadrant? "It's vital," says Lloyd Cole, director and chief information officer of Pasadena, Calif.-based First Quadrant. "In fact, it was the deciding factor in our software selection process." The asset management company, which favors a quantitative approach, recently purchased decalog's IDEE Trader and IDEE Compliance, and plans a phased implementation. The company relies on computer systems - not fund managers - for objective analysis of market conditions, and uses in-house applications for pre-trade compliance. Since portfolio modeling systems make trade recommendations, compliance guidelines are checked in the portfolio modeling systems, so only trades that meet a client's guidelines are recommended. Guidelines are checked within the individual PM systems used for asset allocation and for equities. However, checking individual trades isn't enough, says Cole.
"We've built these complex, layered portfolios, and we want to provide a portfolio-wide constraint, e.g., exposure to a group of companies in all forms, an exposure that could extend to both equities and futures positions," he says. "Those compliance checks are done manually, a time-consuming process."
Also, the company works transactions for periods of longer than a day. At the time a trade is recommended, the trader knows if it's inside compliance guidelines, but traders in the market are often doing partial fills and manually entering that data into First Quadrant's system. "We need compliance when we release the trade for execution," Cole emphasizes.
Cole says the IDEE software will allow the company to do more comprehensive compliance checking, both pre-trade and post-trade. The compliance module is shipped with more than 150 standard rules, and a rules editor for creating additional ones. Cole expects that First Quadrant will write several thousand rules during its implementation. The first implementation stage begins this summer; both modules are slated to be implemented over a period of 18 months.
Ease of integration was also important in First Quadrant's selection. IDEE integrates well with the firm's existing systems: its in-house derivatives accounting system and Axys, its equity accounting system from San Francisco-based Advent Software. The company's existing hardware was adequate, although First Quadrant installed a Sun Sparc server configuration for high availability, dedicated to compliance and trading applications.
"The mandates from our clients are very complicated," says Cole. "Compliance is not something you can do halfway."