Since the financial crisis blew through the securities industry, the impact on IT systems has been dramatic. In one key area, pre-trade compliance technology, the crisis has spurred a transition from option to near-necessity.

“Since the financial crisis, everyone has been forced to look at their compliance processes – what should take minutes took days [to accomplish] in some cases,” says Spiros Giannaros, vice president of sales for the Americas at Burlington, MA-based software provider Charles River Development. “People could not pull together their total exposure.”

Specifically, he says, there is a post-crisis focus on real time notification; greater emphasis on audit control; a move toward global strategies, and a trend toward convergence

“There was little in the way of new innovation in the years leading up to the crisis,” Giannaros says.  Now, “We have been forced to look at everything from the ground up. The whole notion of pre-trade will have to change.  A lot of people were taking speculative positions. People will continue to use derivatives, but for hedging.”

Pre-trade compliance technology uses business rules to automate monitoring and adherence to client, regulatory and asset manager guidelines. Pre-trade compliance generally occurs in the portfolio modeling module prior to queueing in the trade blotter. However, any trades entered into the trade blotter must also be scanned for pre-trade compliance, a process measured in seconds

Charles River is a major player in the space, with over 300 customers and $174 million in revenues. Nearly all of them use Charles River as their complete compliance solution.

Charles River last month released IMS Version 9.1, the eighth generation of its Investment Management System. The latest version introduces advanced execution management, new performance measurement, and an attribution and performance risk module.  

Charles River Compliance, available as a stand-alone or as part of Charles River IMS, provides advanced compliance rule building, testing and maintenance, customizable reporting and complete audit history. An optional browser-based workstation allows users to remotely monitor and manage pre-and post-execution compliance issues, and respond to warnings – including breaches by manager, account, rule or severity – in real time.

“Vendors are forced to look at all the elements that have changed,” Giannaros says. “A big part is dealing with exceptions in real time. We focus on real-time notification of exceptions.”

Also, he says, firms will be forced to have more audit control: “Our proprietary compliance processes are focusing on building out audit processes. Going forward, separate systems are a point of risk. People are moving away from that to consolidation and convergence.”

Another change is increasing emphasis global regulations, rather than just those in the US, he points out: “Internationally, there is no such thing these days as a domestic asset player. We emphasize working closely with customers and regulators to build out rule libraries. We are building our client base in Japan, and have opened offices in Tokyo and Beijing.”

Denise Valentine, a senior analyst with Boston-based research firm Aite Group who has written extensively on pre-trade compliance technology, says there are a few dominant vendors, including Charles River, Eze Castle Software, and Fidessa Latent Zero. “The stand-alones have become pretty sophisticated,” she says. “Visuals and flexibility are much more progressive. The solution is more independent of the vendor. Post-crisis, stand-alone vendors can do a great deal. For trade compliance, they have set up more rules to observe more information more clearly.”
 
There are also integrated portfolio suites, she notes: “They do trading with a trading compliance capability. It is really just a question of what you monitor.”

Going forward, “We might see some sell-side surveillance vendors come into the money management community,” she says. Two examples are Princeton Financial Systems’ MIG21 and anti-money laundering provider Actimize.

Valentine has praise for Charles River’s forward-looking international strategy.  “More global expansion makes a lot of sense,” she says. “The question of international controls and procedures is one we are going to have to live with for a long time.”

This article can also be found at SecuritiesIndustry.com.

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