Scrutinizing Compliance Technology

To what extent has the profile of compliance been raised in recent years, and how has technology both impacted this and been impacted by it?
MG: Raising the profile is dead on the money. If you go back, even as few as five or six years ago, the compliance department was very much an isolated part of the organization. Now, what we’re seeing is that compliance is part of the whole organization, and in fact very much part of the decision-making process. Particularly from our perspective in the vendor space, if we’re going in and talking to people about trading technologies or portfolio management tools, there is always a compliance person in the room, they’re always checking if it has the correct audit-trail functionality, and that what you’re implementing is fit and proper for the business. They’re no longer looking purely at running a rules engine against portfolios—although that is still a large part. It’s very much a perspective on how compliance is built into the entire operation. That’s been a big change.

A big part of that in terms of how it affects technology is that it now has to be compliant with industry best practices. Because of the way in which regulations have come in, there’s a lot less voice trading, and everything is going through systems. That big push has meant that those systems are coming under more scrutiny, so the role of the compliance officer has now expanded across systems, as well as individual entities within an organization.

DH: Even in terms of the chief compliance officer, the profile of the role has been raised tremendously over the past five years or so. They’re now included in all sorts of decision-making, in terms of the vendor space and the day-to-day operations of the firm. From the asset management side, these firms now have to show evidence of controls, policies and processes in place, and that’s where the technology becomes important. You can’t just say you have a program in place—you have to show you have a system to monitor information. We’re also talking about reams of data to review and oversee, which again becomes an important technology piece.

How important is it for compliance systems to be centralized within the technology base at a firm, or at least have the ability to talk between systems, given a broadening of asset classes and trading strategies on display these days?
MG: It’s an absolute necessity. In the past, regulators weren’t quite as savvy as they are now, so when regulation came out, people found a way to get around it in certain ways. Now, they’re a lot more observant, and when you look at regulations, it’s about the underlying and whether you have exposure to a particular name—they’re less concerned about the instrument. The problem that leads to is that if you have an equity desk, an equity derivatives desk and a corporate bond desk, all of those can have combined exposure to a certain issuer. What you have to be able to do is calculate your combined exposure, which is difficult to do if you’re using three different platforms.

Because of that, the compliance aspect has to be across those different lines. A lot of people we’re talking to might have more than just Linedata in-house, and what they need is to be able to look across all of those platforms to calculate their combined exposure at that point, and say whether they are compliant or not. There’s no way of doing that unless the systems can talk to each other, or unless you have a single compliance system running against all of them.

To what extent is historical compliance important, given regulatory penalties of late for breaches that might reach back years?
MG: It’s very important. Because we’re getting rule changes so quickly now, particularly around things like sanctions, although we can code rules around them and put systems in place, sometimes you just don’t have the data available at that time. What you have to do there is plug in historical data stretching back weeks, and only then can you run compliance. That’s vitally important because of the focus on audit trails, so when the Securities and Exchange Commission (SEC), or the Commodity Futures Trading Commission (CFTC) come in, you have to be able to prove that you thought you were compliant over the period in question. With this, you can show that you were.

DH: From a regulatory standpoint, things are changing so rapidly. Within hours, you could have a ban on short-selling a stock, and by the time you’re informed you have to be able to go back and prove that you were fine. In addition, people want to look at trends. Setting aside the regulatory aspect, they need to be able to review what’s been happening over a certain time horizon, and do some trend analysis for risk management.

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