“What is?” Coding a Compliance Rule Library

Guest Contributor: Kristi Feinzig, Senior Consultant, IMP Consulting

Automated rule libraries have become essential to the trading process, and can have a significant impact on the front office.  Rules that are accurate and precise facilitate a smooth pre-trade and post-trade check, while vague and inaccurate rules can create noise, slow down the trading process, and leave the door open for expensive trading errors.  In recent years, best practices have evolved to improve the quality of the compliance rules library by restricting the ability to write a rule to a few, anointed individuals in an organization.   As regulations have grown more complex, the automated rules have followed suit, and some compliance managers have delegated the task to Technology, leaving it to them to “code” the rules.

Compliance Rule “Coding:” What does it really mean to “code” a compliance rule?  If you have a home-grown system, it may mean that it is written in a SQL-like fashion, and some programming skills are necessary.  If you have a commercial system, however, “coding” the rules is a bit of a misnomer.  It is shorthand for the tasks involved in turning the “plain English” legal definitions in a prospectus, SAI, client agreement, indenture, or regulation, into a logical statement that can be processed by your compliance system.   Most of the market-leading systems have a “plain English” interface that facilitates rule coding by non-programmers.   Why, then, is rule coding so challenging, and why do so many automated rule libraries end up rife with errors spewing “false positives” that slow down the trading process?  The issue is that the commercial interfaces, while helpful, do not alleviate the necessity of crafting precise, logical statements.  In fact, most of the logical thinking about how to translate a compliance mandate should take place before the rules are written. Below is an example of an institutional client mandate:

The fund shall invest a maximum of 5% in the holdings of any single, non-domestic issuer.

• Shall Invest– Does this rule apply to current holdings or new purchases (or both)?  For example, if an equity holding increases in value, and thus grows to more than 5%, must the fund sell a portion of the holding to bring it back to 5%, or does this rule simply restrict additional investment?
• A Maximum of 5%— A percentage calculation requires a numerator and a denominator.  Does the rule specify the denominator we should use?  For example, the denominator may be simply the total of all investments or it may also include cash.   For a bond fund, the denominator could be the total net asset value.  For balanced funds, the denominator may be segregated by investment class–i.e. equity only or debt only.  Does the rule specify the numerator—are any securities, asset classes, or issuers excluded from the calculation, such as Treasuries and/or agencies? For structured products and indices, do you look-through to the underlying exposure?
• In the holdings of any single non-domestic issuer– What counts as a single issuer?  If the security is an equity, do we have the proper parent/child relationships constructed for issuers?  If this is a wholly-owned subsidiary, should we roll the holdings up and count it against the 5% limit on the parent?  How does the rule apply to municipals, i.e. do we have obligors/guarantors identified?
• Non-domestic issuer:How does the fund define “non-domestic?”  Is it primarily concerned with the country of incorporation, the country in which the firm primarily does business, or perhaps the country of the primary exchange on which the instrument is traded?  Some funds will also exempt certain countries, such as Canada, from the “non-domestic” label.  Some funds or accounts may also be referring to a non-domestic country according to the client, not the investment manager.

Generally, there are specific categories of compliance rules.  Some are easier to code than others.  Exclusion rules simply prohibit something from being traded. Limit rules, like the example given above, can also be straightforward; but keep in mind that there are several ways the source document may read.  Do you want to include or exclude a position that is exactly at 5%?  Do you only want to flag if it is greater than 5% or do you want a warning when it gets close to 5%?  If you are coding compliance rules, you will likely also come across trade rules like no cross trading or restricted brokers.  Finally, you will want to consider what time of day your rule will run.  Is it meant to run in pre-trade, post-trade, in batch compliance at the end of the day?

Clearly defining your compliance rules will help ensure consistency across the organization. It will also ensure that you will know what to expect as the rules are automated, and that the rule “coding” can be done efficiently and consistently.  Lastly, it will ensure that your automated compliance engine will do the job it was intended to do, lowering the risk and improving the efficiency of your trading process.

 

The Corporate Actions Golden Copy: Cleansed Data for All

Guest Contributor: Brendan P. Farrell, Jr., executive vice president and general manager, XSP, SunGard

As the volume and complexity of corporate actions events continue to grow, firms need to understand their risks and take action on events that require immediate attention. To achieve this, the process must start with complete, accurate and timely corporate actions data.

However, most organizations are tasked with capturing and cleansing corporate actions data from multiple sources in order to create their own “golden copy,” or single, issuer-approved communication. Industry analysts agree that a streamlined corporate actions lifecycle starts with clean data, which has led to discussions about managed data services to help firms automate the process of creating a golden copy. The demand for Business Process as a Service (BPaaS) data services is growing as firms seek experts to validate their data and automate the process earlier in the lifecycle.

The high-touch world of corporate actions

To create a single corporate actions event, staff must access data from disparate sources such as custodians, brokers, vendors and various publications to compile the necessary information. Without the right data in place, coordinating this communication may be difficult and sources could be missed. In addition, the corporate actions learning curve is steep and the cost of getting it wrong is very high.

The complexity of handling corporate actions requires a number of manual touch points, beginning with the creation of a golden copy as a first step.  In order to overcome risk, firms have resorted to redundancy through multiple data sources backed up by teams of “maker-checker” processors, and the expense can be significant. Corporate actions also require significant domain knowledge and experience. The risk of losing a senior expert on the team is a significant threat, as the industry lacks a sizable pool of skilled people to fill the gap, especially outside of the major traditional financial services centers.

Many firms are now realizing the value of a corporate actions data service to help them reduce the exposure, risk and cost of data management and staffing.

The corporate actions data service

Corporate actions data is universal; thousands of firms process the same information in the same way, every day, making it ideal for a utility environment. The top priority for any firm is getting the data right in a timely manner so it can serve its clients and ensure back-office systems work efficiently.

Firms that obtain corporate actions announcements from their custodians or prime brokers typically still subscribe to other market data feeds to prime the pump, allowing for preliminary notification to their downstream clients.  They often also perform additional scrubbing in order to validate the data and create their own golden copy. In contrast, an independent corporate actions BPaaS would provide one source of consolidated, cleansed and scrubbed corporate actions announcement data from multiple data providers to create a single golden record. Such a service could help firms alleviate staffing challenges, reduce risk and cost, and support entry into new markets.

 Exploring corporate actions data services

When deciding to explore BPaaS options for corporate actions, it is important to understand the provider’s strengths and weaknesses. Specialized expertise in corporate actions is a must. It is also crucial to learn the provider’s data management background and other offerings. The four main attributes of a qualified data service include the following:

• Managed by a specialized team of corporate actions data experts
• Quick to deploy and at a low total cost of ownership (TCO)
• Available to and suited for any size organization
• Provides bundle and integration options with other corporate actions and post-trade offerings

Technology providers usually offer solutions that help firms automate the corporate actions process from the point at which the customer obtained multiple data sources. With growing demand to reduce risk and cost, specialized BPaaS data services are emerging to give firms the ability to bypass multiple steps, reduce data fees and mitigate risk earlier in the process.

In theory, all firms should reach the same golden copy at the end of their data cleansing and scrubbing process.  An experienced technology and services vendor can manage the crucial data portion of the corporate actions life cycle and use economies of scale to make the process less expensive for everyone.

Hear more from SunGard and learn about corporate actions processing at CAPCon NY on Thursday, October 16th.

FTF Rings the Opening Bell for Nasdaq

Maureen Lowe, founder, president, and editor-in-chief, FTF

Maureen Lowe provides a first-person, behind-the-scenes account of ringing the opening bell for the Nasdaq trading day. 

As you might have seen in our announcements earlier this week, the Nasdaq invited FTF to ring the opening bell yesterday as we kicked off our annual FTF SMAC NY event focusing on social media and compliance in financial services.

When the call came on Tuesday morning, it was answered by our company prankster, Kenson David, so when he told me about the invite, my first response was, ‘You’re joking.’ But even as he continued to assure me that he wasn’t, I still wasn’t too sure. At the same time, my body became filled with excitement and anticipation and I was hoping with all my might that it was true.

Once he finally had me convinced that this time he was not, in fact, joking, I without hesitation shouted out, ‘OF COURSE, I DO!’ which erupted in laughter and cheering throughout the office, and some jumping up and down on my part.

After a bit of coordination with Nasdaq officials and some of the FTF SMAC speakers, we were confirmed later that day as the official opening bell ringer for Thursday. Then, the more important decisions came about such as: What was I going to wear? What? Wait, I have to talk for 90 seconds. What am I going to say?!?!

I don’t think I can put into words exactly the exhilaration that was in the air at the office for the next 36 hours. Directions and instructions started flying over from Nasdaq and we had a short amount of time to pull it all together but the FTF team rallied and got it done.

More importantly, my outfit was decided and my opening remarks were written and rehearsed about 100 times through a combination of saying them out loud as I walked the streets of NYC to practicing in front of a mirror.

Nasdaq officials issued a media alert on Wednesday that was picked up by all the major financial news organizations.

As I was frantically working away at my desk Wednesday afternoon, a LOUD ‘Oh my gosh you are on CNN Money. This is crazy!” came from our same prankster, but again, this time, he was not joking. The excitement in his voice for me, for FTF, for the event was something you don’t often find in employees.

The emails started to come in from peers and colleagues: ‘Saw you on Yahoo! Finance!’ ‘Saw you on MarketWatch!’

We were out there, like really out there, and people were noticing.

The morning of the big day felt for me like what Christmas morning used to feel like when I believed in Santa: there was an inexplicable magic in the air. I was excited for me, my team, my family and friends.

My smartphone was all abuzz with Facebook posts, text messages and phone calls.

When I was all put together, I stood at the mirror outfitted in the most expensive shirt in my closet, a pinstriped suit and red high-heeled pumps and said out loud to myself, ‘You got this. Own it,’ as I walked out the door.

As I made my way to Nasdaq in my red high heeled shoes, there was a spring in my step. I stood taller and walked with confidence but was filled with giddy excitement. I kept telling myself remember every moment, enjoy every second, even these minutes as you walk down 44^th Street toward Times Square. From the moment I arrived at the Nasdaq Marketsite, the staff could not have been any nicer, more excited for us or more accommodating.

As I stood at the front door and looked up to see the FTF logo on the big screen, I told the doorman with a gleaming look on my face, ‘That’s my company. We are ringing the bell today (as I made a bell ringing gesture with my hand,).’ He couldn’t help but laugh and opened the door for me.

When the production staff came over to get our group from the lobby and brought us into the studio, it really started to become real. We entered the studio and an exchange segment was going on live. We still had about 30 minutes before the opening bell ceremony started but I was so grateful for the time.

I spoke with the production staff, the host, the camera crew and I became more comfortable in the environment. We did a dry run of what would happen and when. I was told it would be live on CNBC, Bloomberg, Fox News and I felt my eyes widen as they went down the list.

We did a photo shoot with the group and individually which immediately started to rotate up on the giant, Nasdaq screen/tower out in Time Square. We were all elated and were taking pictures of the TVs in the studios showing our photos out in Times Square.

Finally, it was go time.

The host, David Wicks, vice president at NASDAQ OMX, walked up to the podium, gave an amazing introduction about FTF and the FTF SMAC event. Then the moment came when he introduced me and called me up to the podium.

From then on, everything felt like it was happening in slow motion but at the same time it was going so quickly. My heart started pounding a bit more heavily as I walked up to the podium, but I reminded myself, ‘You got this.’

As I stood up there with the FTF logo behind me, my supportive team in front of me, I took a second for myself (but just a split second) to take it all in and then I started speaking. I nailed it.

I remembered everything I wanted to say and I said it with confidence. David came back up on stage and presented me with a crystal plaque which I held up in the air like I had won an Oscar! It was a symbol of achievement for all of us and it deserved to be raised up high.

Then, everyone from our group along with men and women from the U.S. Air Force in attendance to honor the six decades that the Air Force has been serving this country were called up to the stage.

From the FTF team, we had Sarah Hathaway, vice president, Eugene Grygo, chief content editor, and Jett Schilling, sales director. Representing our FTF SMAC speakers were Marla Bergman from Goldman Sachs, Nathan Bricklin from Wells Fargo, Mark Bisard from American Express, and Mitchell Bompey from Morgan Stanley.

At 9:29, we were instructed to cheer as loud as we could for a full minute and we were told the louder we cheered, the better the market did, so we and the Air Force members, screamed and shouted and clapped for a full minute. (For the record, it was a great trading day).

As we came closer to 9:30, we counted down, out loud from 10 seconds. At the one second mark, I was to hit the bell (which is a touch screen), pick up a giant electronic pen, and sign my signature to an i-pad-looking screen which was immediately projected on the giant Nasdaq screen in Times Square.

I practiced this during rehearsal, but this time when I signed my name, I added an exclamation point. A few more seconds of cheering and clapping continued, and then it was done.

As everyone started to get off the stage, one of the senior Air Force representatives stayed behind to shake my hand. He said I had a dynamic that most people don’t have and that I did an amazing job and not many people could do what I just did, the way I did it.

Needless to say, I was stunned and so incredibly appreciative. It was the first feedback I had received. Up until that point, I had no idea what anyone else thought about not only what I said, but about how the whole ceremony was perceived.

I told him how much it meant to me that he took the time to tell me something so kind.

We were then quickly ushered out to Times Square for a second photo shoot.

This time, we were taking shots in front of the large Nasdaq screen which was scrolling the photos of our group taken earlier that morning. We were all having a blast re-living the moment, laughing and exchanging stories about our experiences.

But, little did we know, the camera man was still filming. The reel from these moments is almost more fun to watch than the actual ringing of the bell (I said almost) because it captured the pure excitement and gratification we all felt for what had just happened.

After the photo shoot, we hopped in cars and made our way down to the FTF SMAC event because despite our 15 milliseconds of fame, there was an event to run after all. Needless to say, we were all on a “bell high” for the rest of the day.

During the cocktail reception after the event, our bell ringing group celebrated with a bottle of champagne. We will forever remember this experience and we will forever be connected in a special way because we experienced it together.

The only thing I would have changed about this day would have been for the whole FTF team to be present, but this was not possible with the event happening simultaneously.

When I started FTF eight years ago, I never imagined how much we would have accomplished in such a short amount of time.

But, from the bottom of my heart, I thank you all for helping me to have this opportunity. Thank you for noticing what we are doing and for supporting our growth and success.

But most of all, thank you to the FTF team who work so hard every day to make this company what it is and for believing in what we are working to achieve. And last, but certainly not least, thank you Katie Flanagan, for organizing and producing an amazing FTF SMAC NY event this year.

Next time, you will be up there ringing the bell too for our IPO!

The 7 Data Extraction Problems That Plague Corporate Actions and the 1 Solution to Them All

Guest Contributor: Adam Devine, VP Product Marketing & Strategic Partnerships, WorkFusion

 
Whether you provide a corporate actions feed or integrate them at an institution, you know that the gold standards for data accuracy, speed, and efficiency are rising. If you’re a provider, you know that the lake from which you fish relevant news has turned into an ocean that spans continents and languages, and it’s fed by an increasing number of sources and formats that neither headcount nor technology can efficiently keep up with. STP is still a unicorn.

These are the 7 reasons why:

1. Automation is picky and noisy. There is no one platform that can extract data from any source in any format in any language. That’s a little like pointing out the inexistence of unicorns. Data providers are generally forced to make due with decent automation point solutions for each type of format and muddle through irrelevant extracted data and exceptions.

2. Traditional scrapers and harvesters break when sources change, and repairing them causes downtime. They’ve become more durable over the last three years, but changes in source formats still throw off even the most “intelligent” scrapers and harvesters. Just as printer companies make their money on ink cartridges, traditional extraction vendors make their money on the IT projects born of broken algorithms.

3. Off-the-shelf web scrapers and harvesters require IT to configure and IT to repair.

There is never enough IT staff (or budget) to solve all business problems as quickly and efficiently as business teams and customers would like. Web scrapers and harvesters in particular are vital tools for corporate actions teams, but they aren’t set up for plug-and-play business use. Implementing them is an IT engagement, and fixing them when source formats inevitably change, is often an even bigger IT engagement and expense.

4. Most custom automation is too big of an investment for too little of an ROI. Using machine learning to automate proprietary, in-house workflows has been the dream of the information industry for years, but it’s too expensive and time-consuming to realize it for all but the very biggest and most profitable data products. Stock automation and human exceptions management is the default for the majority of workflows.

5. Data specialist resources are squandered on extraction and exceptions work. Data specialists, whether they’re in-house or outsourced, are skilled and expensive, and using them for repetitive work that can’t be efficiently automated or for exceptions that automation can’t handle isn’t the best allocation of resources.

6. Budgets for increasing data specialist headcount are declining. This is making it increasingly difficult to process the growing number of exceptions as fallible automation churns through the growing volume of source data.

7. Outsourcing is becoming more expensive, which is increasing the cost of human-powered data extraction. Offshore labor rates are rising 10-15% each year. The moderate savings you achieved in the first year or two of your contract will start looking dusty by the third or fourth.

What’s the solution?

A tunnel of problems isn’t all that useful without a light at the end of it. The light is crowd computing, a method of work that pairs crowdsourced workers and data specialists with machine learning to train and maintain extraction algorithms. It can be used for any source in any format in any language, and it works 24/7 without downtime. Crowd computing is an efficient path to automating all but the most analytical of corporate actions data work, and chances are excellent that at least one of your competitors is already using a crowd computing platform for data extraction. If this sounds too good to be true, it’s because the future of corporate actions has only just arrived. It’ll take a little time before it becomes everyone’s present.

 

Join WorkFusion at FTF‘s upcoming CAPCon New York conference on October 16, 2014.  WorkFusion will be exhibiting and speaking during the day’s interactive sessions!

Tax Alert on Recently Announced Relief on Money Market Fund Floating NAV Wash Sale, Form 1099-B and Gain/Loss Calculations

Guest Contributor:  Stevie D. Conlon, Senior Director and Tax Counsel, Wolters Kluwer Financial Services

The author thanks John Kareken and Anna Vayser of Wolters Kluwer Financial Services for their assistance.

There were several important announcements made last month by the IRS that provide critical income tax relief for investments in money market funds under new Securities and Exchange Commission (SEC) rules.

Overview

On July 23, 2014, the IRS issued proposed regulations that expand the existing exclusion from gross proceeds reporting and cost basis reporting on Form 1099-B for “floating NAV” money market funds (MMFs) under new SEC rules for certain investment companies.

The IRS also issued proposed regulations providing a taxpayer elective simplified net gain/loss method of reporting gains and losses from floating NAV MMFs. Under the elective reporting method, because no loss is determined for any particular redemption of shares, the IRS has stated that the wash sale rule does not apply. For taxpayers that do not elect the simplified reporting method, the IRS also issued a revenue procedure providing that the wash sale rule does not apply to sales of floating NAV MMF shares. Although this guidance was issued in proposed rather than final form, it is effective immediately.

Explanation

On July 24, 2014, the SEC voted, as noted in a Treasury Department fact sheet of the same date, “to require certain money market funds (MMFs) to price shares in a manner that more accurately reflects the market value of the funds’ underlying portfolios.” These certain MMFs can no longer rely on special SEC exemptions that allowed them to maintain a stable net asset value (NAV). For these funds, the share price will float and the funds will be known as floating-NAV MMFs.

The stable share NAV of money market funds, typically $1 per share, came under pressure in the recent economic crisis, as fund outflows demonstrated the real risk of funds breaking the buck, or being unable to maintain the stable $1 per share NAV.

SEC Rule 2a-7 contains detailed rules for MMFs and the type and quality of assets which the fund is permitted to hold. One requirement is for the fund’s use of the amortized cost method of valuation that calculates NAV by valuing the fund’s portfolio securities at their acquisition cost “as adjusted for amortization of premium or accretion of discount rather than at their value based on current market factors.” Together with this requirement, Rule 2a-7 requires the use of the penny rounding method of pricing – “the method of computing an investment company’s price per share for purposes of distribution, redemption and repurchase whereby the current net asset value per share is rounded to the nearest one percent.” These requirements permit the fund to maintain a stable net asset value, or stable price, per share.

SEC Amendments

The amendments to SEC Rule 2a-7 require certain funds to use market valuation of their portfolio securities for distribution, redemption and repurchase, thus causing the share price to float rather than remain stable at the typical $1.

With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.

The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.

Treasury and IRS Guidance

In a coordinated action with the SEC last month, the Treasury and IRS issued proposed guidance in the form of proposed regulations (REG-107012-14, published in July 28 Federal Register) that provide a “simplified, aggregate annual method of tax accounting for these gains and losses, simplifying the tax treatment and promoting compliance.” The Treasury Department fact sheet notes that the guidance is “proposed rather than final to provide the public an opportunity for comment. Nevertheless, shareholders in floating NAV MMFs can now rely on these proposed regulations to begin to use the simplified method.”

Simplified accounting

The proposed IRS rules permit a simplified method of accounting (the NAV method) allowing shareholders to aggregate transactions and measure net gain/ loss, using information routinely provided by the funds. Net gain/loss is to be determined by the increase or decrease in share value for a certain period, such as the tax year minus the net investment in the shares, i.e. purchases minus sales for the period.

Wash sale relief

Under IRS Code Sec. 1091, a wash sale occurs when a shareholder sells a security at a loss, and within 30 days before or after the sale, acquires a substantially identical stock or security. The new floating rate funds would cause a shareholder to run afoul of the wash sale rule because the floating rate would generate losses on sales of shares that would be disallowed and cause enormous complications for taxpayers making many purchases and sales of money market shares, including, as the IRS notes, purchases made as a result of sweep arrangements and reinvestments of monthly distributions. As the new IRS proposed rules and a new revenue procedure explain, the wash sale rule would not be triggered by losses that are netted by using the simplified NAV method of reporting. To address the wash sale situation for those that do not use the NAV method, a new and final revenue procedure, Rev. Proc. 2014-45, was issued by the Treasury and IRS. It provides that a redemption of a money market fund share of a 1940 Act investment company shall not be treated as part of a wash sale under these circumstances: (1) The investment company is regulated as an MMF under Rule 2a-7 and holds itself out to investors as an MMF; (2) At the time of the redemption, the investment company is a floating-NAV MMF.

1099-B exemption

The proposed IRS rules exempt the new floating-NAV funds from gross proceeds, basis and holding period reporting under IRS Code Sec. 6045. Stable value money market funds were excluded from such reporting under Treas. Reg. 1.6045-1(c)(3)(vi). This rule states that “no return of information is required with respect to a sale of an interest in a regulated investment company that can hold itself out as a money market fund under Rule 2a-7 under the Investment Company Act of 1940 that computes its current price per share for purposes of distributions, redemptions, and purchases so as to stabilize the price per share at a constant amount that approximates its issue price or the price at which it was originally sold to the public”. The proposed rules eliminate the reference to stable value funds so that the exemption applies to all Rule 2a-7 funds.

The revenue procedure wash sale relief for redemptions is effective for redemption made on or after the effective date of the SEC rules discussed above, expected 60 days after Federal Register publication. The proposed regulations on the NAV method, although not final, can be relied on by shareholders of floating-NAV money market funds for taxable years ending on or after July 28, 2014 and beginning before publication of final regulations.

Stevie Conlon will be a featured speaker at the upcoming CAPCon New York conference on October 16, 2014.   Stevie will be speaking on the “New Corporate Action Burdens Under FATCA” with Dana Pasricha, Vice President at Brown Brothers Harriman.

They will be discussing how the new Foreign Account Tax Compliance Act (FATCA) rules require tax analysis of corporate actions affecting investments in debt securities that can affect U.S. tax obligations that firms must withhold on payments to clients. The new rules for grandfathered FATCA debt obligations and determining when corporate actions adversely impact favored grandfathered status will be explained. The operational and compliance challenges under these new requirements will also be discussed.

 

 

Software as a (dis) Service – Going in with Your Eyes Wide Open

Guest Contributor: Jane Stabile, President, IMP Consulting, Boston, MA

The asset management business has never been more competitive, and CFOs are under tremendous pressure to keep their firms lean. As CFOs seek solutions to keep the headcount down, the argument for Software as a Service (SaaS) has become particularly appealing. SaaS solutions promise to help your firm focus on investment management and “get out of the software business” by having the vendor run and maintain your systems. The argument is compelling; the vendors will assure you that they can support a high-quality, mission critical service as well or better than your in-house technology group can, and at a much lower cost. If you are looking to make the leap, a SaaS system may do exactly that. If you suspect it might not, how do you evaluate the shortcomings and what can you do about them?

In my experience, there are three critical areas to evaluate:

• Fit and coverage
• Flexibility
• Cost Containment

Fit and Coverage: Most SaaS offerings are not extensible, so you will not be able to manipulate tables or run custom applications against their databases.   If there are significant gaps in functionality, you’ll have to live with them, so make sure the solution fits your business processes. Part of the attraction of the SaaS product may be that the data is included, and the TCO (total cost of ownership) analysis may include a big cost savings over sourcing that data separately. However, some vendors require separate subscriptions to underlying data that you may already have, so those costs will remain. Conversely, you may discover that the SaaS product’s data has some gaps in coverage that can impact your firm’s ability to model portfolios or monitor compliance. Before committing to the deal, take a deep dive into the data model to ensure that the quality and coverage of the data matches the needs of your firm.

Flexibility: Vendors have no incentive to make it easy for you to switch to a competitor, and it can be difficult to decouple systems when you don’t keep them in-house. If your portfolio managers add new strategies or expand into asset classes that are not native to the system your firm has chosen, you may find yourself doing extensive work-arounds to accommodate the change, or hitting a brick wall. For example, forcing complex derivatives onto a system that specializes in corporate bonds or vanilla swaps, may be impossible, and you may end up supporting macro-laden spreadsheets or creating additional workloads for your middle or back-office to maintain accurate holdings. Developing a thorough understanding of the level of standardization that your vendor employs is the key to evaluating your true costs.

Cost Containment:   Are there any penalties of not going live by a certain time, or when the vendor’s “production” license kicks in? Carefully scrutinize the vendor contract and ask for it in writing if it isn’t clear—does the license take effect upon “go-live,” or parallel? What if the timeline is delayed; does the vendor take responsibility or does your firm get stuck with the additional cost? On a recent project, I found myself working with my client to QA the vendor’s configuration and document the problems, just to help the firm avoid the late fees the vendor was attempting to charge. In fact, you may want to add some cost assumptions into your implementation and maintenance calculation to accommodate the QA you may need to do when new releases or patches are issued. Some vendors will allow you to opt out, but some will not, or allow so little time between the announcement of the release and its deployment that it may be impractical to do. Others may allow your firm to have more control, but the time it takes to test and implement a vendor upgrade or patch that may not help your firm could be a costly and time consuming endeavor. Finally, vendors will want to keep the number of users included in a contract to a minimum for performance reasons and to keep their costs down on the hosting side. Consider these costs as your firm grows and needs to add additional users.

Bottom Line:   There are now SaaS products available that can serve mission-critical areas of your firm’s infrastructure—from trading and compliances systems to all areas of the front, middle, and back office. If something goes wrong on the vendor side or you can’t get the attention you need when there is an issue, it will be your firm’s reputation on the line. Ultimately, the risks may be manageable and the benefits substantial, but it is important to go in with your eyes wide open.

Financial Trading Infrastructure: The Era of Cloud 2.0

Guest Contributor: Jacob Loveless, CEO, Lucera Financial Infrastructures

The freedom to try new things
The equity downturn has fueled a trend in multi-asset trading that is prompting firms to test new strategies. They realize they can no longer merely trade or price a single asset class. To compete, they must have asset diversification and multi-asset trading strategies– but many lack the freedom, infrastructure scalability and resources to do so.

Historically, a firm would have to wait weeks or months to arrange the infrastructure components required to procure, deploy and test a trading strategy in a new asset class or location. This lengthy process slows time-to-market and creates a large resource and monetary investment up-front – a barrier to innovation.

Managed trading services give these firms the ability to quickly deploy secure, high-performance systems, lower total cost of ownership (TCO), predict and scale monthly expenditure and create new possibilities for trade innovation, strategy development and alpha generation. That means financial trading firms can test applications and new ideas in close to real-time, while predicting and controlling costs.

For these reasons, Aite Group projects that global spend on managed services will increase from $500 million in 2012 to $620 million by 2015, and Tabb Group estimates that by 2016 adoption of managed services infrastructure across companies will hit 50%. With efficiency and scalability now under control, organizations are looking to their infrastructure to solve greater problems.

A big red button scenario
High-profile trading freezes and glitches have drawn considerable attention to the industry’s need for a “kill” switch or “big red button.” These could be used in a situation where dangerous order flow needs to be halted to minimize market impact. Regulators agree this could minimize risk but hotly debate who should be able to push that “big red button” and how much of the infrastructure it should shut down when pushed.

The difficulty with the proposed “kill switch” is that it would shut the firm off from the entire market by preventing the flow of information in and out of the company. While in the short-term it would prevent that company from sending potentially compromised orders out into the market, it also handicaps the firm from receiving information from the market that could help identify and reconcile the issue.

Take the centralized limit order book where all participants push data as an example. If something goes wrong and the order book is affected, the firm has to bring the whole system down. But what about a scenario when only one server is impacted? What effect would it have if only the compromised portion of the infrastructure was taken offline? Or better yet, what if an exchange could turn off one market participant from sending orders but still allow them to receive data in order to quickly reconcile its issue without impacting the rest of the market?

These scenarios demonstrate the importance of being able to segment infrastructure into zones – a technique that is becoming critical to deliver operational advantage. The ideal big red button scenario would allow the system to react quickly to protect the business and the market and only turn off the piece of the infrastructure experiencing failure. In the event of a problem in a software-defined network, a company can self-select to shut down a compromised zone, remaining fully operational while the issue is addressed internally. This zoning technique guards both the participant, and the market.

A better cloud model: Cloud 2.0
The traditional multi-tenant cloud model has not been able to meet the latency demands of trading applications, marking a considerable barrier for cloud-based infrastructure. It also does not allow for data collocation. Companies now have to ship data to different data centers and pull it back up over a virtual private network, which increases costs because of the shared storage and bandwidth. Using a single tenant system allows for better performance and is more cost effective.

The move to Cloud 2.0 will not only speed time-to-market, promote innovation and remove cost pressures associated with traditional infrastructure, it can give companies the operational advantage they need to compete in today’s complex financial markets. Firms that embrace Cloud 2.0 will be empowered to utilize new trading strategies and enter new markets with greater control, predictability and scalability around their costs. Disaster scenarios can be more easily contained by understanding how to use a software defined network and zoning to more intelligently respond to infrastructure challenges that might traditionally cripple a company or impact the market. With latency no longer the most important differentiator for firms, the era of Cloud 2.0 will allow firms to meet complex infrastructure requirements in a high-performance, secure environment that can continuously evolve to solve the next big challenges in the market.

Why Financial Services Brands Aren’t Equipped for Social Media Risk & Compliance

Guest Contributor: Devin Redmond, Nexgate CEO and Co-founder

No longer are financial brands and organizations able to focus solely on storefronts, email aliases and toll free numbers for customer engagement and support. Nowadays, a brand must engage customers 24/7 in social media. However, as we have seen with the rise in social media spam, the increase in social fraud, the continuing social account hacks and the ever increasing regulatory focus on social media, financial services’ social media programs bear the broadest set of risks and compliance challenges.

In fact, each of the specific financial services sub-verticals including retail banking, insurance, wealth management, credit cards, etc., all tend to have two to three major categories of social media programs including centralized brand programs, advisor / agent programs and social customer care programs. Unfortunately, they may only be partially equipped to handle risk and compliance for just one of their social programs.

Brand programs face regulations but also tend to be exposed around fraudulent accounts, account hacks and social media spam. Social care programs have to worry about those same issues as well as regulated and sensitive data handling like PII and PCI on top of violations of FFIEC Regulation Z and DD or FINRA Customer Complaint Risks regulations.  Advisor and agent programs have to tackle industry regulations like FINRA, FFIEC, FTC and SEC, along with corporate standards such as using approved employee bio data, approved publishing tool workflow and keeping the agent or advisor account protected.

Here are several best practices to help financial services organizations address the broad set of risk and compliance challenges they face in social media:

1. Define Organization Responsibilities & Policies: Establish a cross-departmental working group defining and executing on who is responsible for creating policies, enforcing them and responding to incidents across social programs.
2. Learn Compliance Context: Social marketers, brokers or agents and IT teams are not inherently compliance experts. Therefore, they must be trained by internal and external compliance experts, so they are informed as to the context of the regulations.
3. Protect Social Accounts: Maintain access control on social pages, profiles, and accounts by protecting passwords, restricting what tools can publish on the account and monitoring the account to detect and stop account hacks.
4. Enforce approved tool use: Active monitoring, enforcement and reporting, which identify the right tool that was used to publish, should be in place as a key to establishing workflow, passing audits and demonstrating policy enforcement.
5. Don’t rely on keyword detection: Less accurate keyword dictionaries and manual workflows don’t scale. Technology that understands the content and context should be used to automate detection, handling and improving retention and eDiscovery search for many compliance, legal and related content violations.

With financial services brands committing more and more resources to social media, the urgency to protect that investment grows with it each day. Without a serious plan and investment in this broader set of social risk and compliance areas, financial services organizations will struggle to efficiently, effectively and safely scale their social programs.

 

Hear more on this topic and more on social media and compliance in financial services at SMAC New York on September 18th.  Check out the speaker line-up and all event details online here.

The Power of Feedback Loops: Fostering an Environment that Supports a Healthy ERM Program

Guest Contributor: Stephen Taylor, Senior Market Manager, U.S. Enterprise Risk & Compliance, Wolters Kluwer Financial Services

In the wake of the financial crisis, strategies for managing enterprise risk have taken center stage of organizational decision making and many institutions have revamped their entire approach to understanding the nature of the risks they face and how to mitigate against them. A sophisticated approach to managing risk is a continual process of systematically assessing, measuring, monitoring and managing risks in an organization. Moreover, it ensures that the “big picture” is not lost to the daily demands of running a business.

One of the best ways for an organization to accomplish this is through establishing a risk management “feedback loop” to continually assess whether the assumed risk is reasonable and appropriate, or whether the situation should be reassessed. Feedback loops are effective tools for positively impacting and changing risk behavior, since they allow the institutions to address minor issues at the lowest level and empower business lines to self-correct—while keeping the focus of the executive team on more high-level business concerns.

Increasingly, boards and senior executives are looking to develop effective key risk indicators (KRIs) to drive success in their ERM process and improve the execution of the organization’s strategy while pushing responsibility and accountability into the front-line business units. These KRIs serve as a type of feedback loop, providing organizations with an early warning sign of increasing risk exposure in various areas of the enterprise.

Getting visibility into specific regulatory rule changes alone isn’t enough, for example. Firms have to be able to pull this information through the business and clearly demonstrate to shareholders, investors and regulators that relevant action has been taken. The ultimate verification is that controls have been put in place to mitigate any potential risk and that these controls have been positively tested.

This is what we think of as a “virtuous circle” of effective risk management and it is critical to success. In order for it to work, however, there has to be the right “tone at the top.”

For a true risk management culture to take hold within a financial services organization, there must be a pervasive philosophy communicated from top management down through the organization and embraced by staff. Every employee must understand the organization’s risk appetite and where the “edges of the envelope” are for each business line, product and geographic unit. Front-line managers must buy into the risk appetite, and operate under it, for the risk culture to be effectively implemented.

As a rule, KRIs should be monitored closer to the “front” than in the higher reaches of management. It is important to establish a good working relationship between the risk management function and the business units, so that employees view risk managers as making a positive contribution—rather than just someone who enforces the rules. Instead of relying on the risk function to manage risk, financial institutions need to hold accountable and empower the front-line managers to make decisions in a more risk-aware way.

The best ERM practice has business managers, profit centers, business units and functional heads assume full responsibility and accountability for the risks they take.

Senior management and boards of directors do not need to know, nor are they necessarily in a position to fully appreciate, all KRIs employed within the organization, but they should be expected to understand and be kept updated on KRIs related to the organization’s top risk exposures.

Having the right culture for compliance is crucial and this can be improved if it’s demonstrated that effective compliance is not to be seen as an ineffective cost center, but as a way of running an ethical business which not only can improve the strategic direction of the organization but can improve the firm’s reputation within the market.

 

Learn more from Wolters Kluwer on October 16th, when they sponsor FTF’s CAPCon New York conference. Stevie D. Conlon, Senior Director and Tax Counsel for Wolters Kluwer will lead a discussion on new corporate action burdens under FATCA.  View the full events agenda online here.

 

Insurance and Innovation: Are you In or Out?

Guest Contributor: Sheryl Brown, Social Media Coordinator, Ash Brokerage

So when you say “financial services” or “insurance” do you immediately think of the word “innovation”? Um … likely not. (Hint: We are not the cool kids on the bus. I hate to break it to you this way.) Why is that? Why, as a group of professionals, are we so far behind in being radically different? What are we scared will happen?

I recently polled all of my friends on Facebook (Hey, I have 500 friends on Facebook, so the poll has a little depth to it … #TongueInCheek). I simply asked them what came to mind when they heard “financial services” and “insurance.” Some of the responses were:

– Medical needs
– Death
– Pushy sales people

Oh my. That’s not very innovative stuff, is it? But wait … there’s more.

How do we describe what we do? What kinds of words SHOULD we be using with our family, friends, clients and businesses so we can change these thoughts? Who should we be talking to about these things?

I believe we need to create a fundamental shift by using the term “community” instead of “industry.” Industries produce widgets. What exactly are we producing? Yeah, yeah … you could say the policy is the widget, but it’s not the same.

Jean Vanier is quoted as saying, “Every human activity can be put at the service of the divine and of love. We should all exercise our gift to build community.” Think about that for a moment. We are a relationship-based business. That’s what communities are built on … relationships. As a community of financial professionals, we provide peace of mind to our family, friends, clients and businesses. I don’t think I remember anyone saying this about coffee, tennis rackets or pallets, do you? Those are widgets from industries … we are a community.

When you sit down with someone, are you still using outdated words like protection (blech), policy (you mean there are rules?) and premium (I get the best!)? Well stop that now! If you think our family, friends, clients and businesses are hearing these words in the way we THINK we are describing them, you’re dead wrong. I challenge you to read Maria Ferrante-Schepis’ book, “Flirting with the Uninterested” from Maddock Douglas and see what you think. WARNING: After reading this book you, might start thinking about your business very differently. I cannot be held responsible for the increase in business you may start to experience.

Who you are talking to is a big deal too … a really big deal! Are you talking to everyone about what you do? Specific people? How do they hear what you are saying? Start considering this today because it matters. If you’re talking about IRR, COI and WOP, they may be thinking OMG!

Encourage your clients to stop you when you go into jargon mode. We are all guilty of this in the financial services community. I’ve done it and you are doing it today. Instead, challenge yourself to talk to everyone differently. Lose all the lingo and listen from your clients’ perspective. Better yet, find someone who knows NOTHING about what you do and start describing things to them. You’ll be amazed at how many times they raise their hand and say, “I dunno what you’re talking about right now.”

Sure, I can give you all the social media advice to help you ramp up and start exploring a new world and way of doing business, but none of this will work unless you’re innovating and doing business differently. Can you commit to getting comfortable with being uncomfortable?

Are you innovative or out?

Hear more from Sheryl and other social media directors at FTF’s annual SMAC Conference in New York on September 18th, 2014! Check out the agenda and speaker line-up at FTF News.