Compliance technology has advanced significantly, and the asset manager now has a choice of highly functional systems aimed at avoidance of breach. This advance in technology has enabled the automation of a wide range of compliance checks, and it is now a standard practice in the industry to run automated checking of orders and positions.
The primary motivation for a compliance implementation is risk reduction through the avoidance of breach, and the consequent minimization of the cost of breach. However, there are compelling secondary motivations, which include:
- To implement an efficient workflow for breach resolution
- To support the segregation of duties
- To actively manage dispersion
- To formalise the negotiation process for client mandates
- To improve the quality of client mandate review
- To improve the quality and timeliness of management information
A compliance engine is not a substitute for a risk modelling system, but can help with basic limit management, position deviation against model or benchmark, basic dispersion control and counterparty exposure.
In previous generations, compliance functions were scattered among many systems, so that, an order generation system may have had hard-wired checks on resultant positions, a dealing system may have checked connected counterparties and crossing, and an accounting system would have embedded position and concentration checks.
As systems were added to the architecture, more scattered compliance checks would be implemented by those systems. This became a headache: compliance teams would need to look in many different systems to assure the adequacy of compliance checks, there was no central mechanism for tracking.
The demand arose for systems which bring together compliance rules and checks into a coherent pre and post-trade environment. DSTi's HiCompliance is an example of such a server. This system facilitates the delivery of:
- One coherent set of compliance rules, maintained in one place
- One workflow environment for breach management
- One central console for compliance monitoring and reporting
Compliance touches many points in the investment and trading process:
- In model construction - ensuring that models deliver to mandate and house rules
- At order generation - filtering out orders which breach position and concentration limits
- On order capture - monitoring the impact of manual orders
- During price discovery - ensuring that liquidity sources are permissible
- Prior to placement - ensuring that counterparty limits are adhered to
- At execution - monitoring the impact of struck price
- Post-trade in portfolio monitoring - to take account of corporate events and market movements