Coding compliance rules in an automated system is a task that takes significant time and experience to master. In most cases, depending on the system you are using, you will need to learn an entire new vocabulary of coding terms. Over my many years of working with compliance rule libraries, I’ve come to learn that more often than not, naming newly coded rules accurately is overlooked during the test setup process, yet it’s a critical part of managing a rules library properly.
One of the key goals of the rule naming process is to allow portfolio managers, traders, or compliance analysts to quickly recognize the guideline to which a rule name is referring. Based on its decade plus of experience in working on automated compliance systems, IMP has come across numerous situations where rule names set up by others were not effective, causing business users to spend valuable time and energy working to understand which compliance guideline was causing an exception.
In order to ensure that the names of your rules are clear, accurate and easy to understand, here are three tips to make the rule naming process a successful undertaking.
1. Understand the compliance guideline
Before you can properly name a rule in your compliance system, you need to have a good understanding of what its purpose is. Any rules setup process should begin with a review of the source document guideline language. Any grey area around what a guideline means should be clarified with the party writing the document.
A guideline matrix should be created which contains a column for the full guideline language as it appears in the source document, with an additional column that contains the “short name” of the rule as it will appear in the compliance system. IMP’s CLEAR™ methodology calls for the building of a compliance data dictionary, a guideline interpretation document, and an approval process to ensure that all of the above has been adequately reviewed.
2. Be concise, yet accurate
Most vendor compliance systems have a relatively restrictive number of characters that can be used to name a rule. This can present a challenge when you have a guideline that may take up more space in the source document than there is room for in the rule description field. If this is the case, you will need to decide what information to be included in the rule description field is most relevant. If this is difficult to accomplish, there are two different paths that you can take: abbreviate longer words in order for the rule name to fit within its field; or make a note in the name field to refer to the description field where you can provide more details around the rule.
Do your rule names cover all of the relevant details from the source documentation or do they just cover a part of them? You should avoid rule names that simply state: “Limit = 25%”? Remember, all limits should have a qualifier with them (e.g. no more than, or no less than). You will also want to ensure that the “voice” of your rule names is consistent. This refers to whether the rule states what cannot be done (i.e. the “negative voice”), or what can be done (i.e. the “positive voice”). It is our recommendation to generally use the negative voice so it is clear why the violation occurred.
3. Create a framework
Before creating your rules matrix, you should establish a standard for how your rule names will be structured. For example, will you state the limitation, or impacted securities first? Will the rule read “No more than 25% of net assets in equity securities?” or “Equity securities will not exceed 25% of net assets”? (Some systems now allow you to set different limitations for the same rule depending on what accounts the rule is assigned to. If this is the case, you may not want to include limitation percentages in your rule names).
The general framework that we recommend is “RULE NAME = Rule Group + Detailed Description + Additional Info”. Rule Group in this case refers to the origin of the rule. For example, did the rule come from a prospectus, an investment management agreement, or is it an internal risk management rule? Is it part of a regulatory regime (e.g. 1940 ICA, UCITS, etc.)? Whatever the case, your firm should have a pre-determined list of possible rule groups.
The Detailed Description in the rule name will provide the main purpose of the rule. Perhaps, with a ratings test, it could read “Max 20% in below Investment Grade Corporate Bonds using Moody’s, S&P and Fitch Long-Term Ratings”. Using this same example, the additional information would refer to how split ratings between these three agencies would be treated. The rule could say “the highest rating of the three”, or ”average rating of the three”.
Why It’s Important
The strategies outlined above have helped several IMP clients improve their daily workflow. Once changes in names are implemented, questions around the purpose for a rule decrease significantly. As a result, traders and compliance analysts have one less thing to worry about when performing their responsibilities.
Whether you use a similar rule naming convention to the one above or not, it is important that you have documented procedures in place and that you follow them. By using a consistent framework for writing your compliance rule names, you will be able to avoid confusion around the purpose of a rule, and at the same time will be able to promote a well-organized rule library.
This article was authored by Roger Binggeli, Senior Compliance Consultant. For more information, please contact Roger at email@example.com or Jane Stabile at firstname.lastname@example.org. Roger can also be reached on 617-314-7415 x118.