Trade Compliance from a Portfolio Manager’s Perspective PART 2: Seven Suggestions to Improve Your Work Culture and Relieve Tension

Two weeks ago I illustrated the often-strained relationship between Portfolio Managers (PMs) and the compliance team. PMs complain that the compliance team is slowing them down, whereas compliance professionals push back when PMs demand that compliance ‘fix it’. To combat tension, periodic communication between the PMs and compliance is needed. Understanding the PMs viewpoint on the current state of pre-trade compliance and mutual education as needed will facilitate a better working relationship.

In this article, I will offer some practical pointers to help improve and maintain the relationship between PMs and compliance. IMP Consulting’s experience working with multiple clients shows that a little proactivity from the compliance side calms things down, and allows an environment of trust to develop between the PM and compliance teams. Please note an underlying assumption is that the PMs have undergone proper system training. If this is not true, then training the PMs so they can properly understand and work with compliance alerts is critical and must be done first. Here are seven ways Compliance can foster a better working environment with PMs:

1.     Conduct periodic meetings with PMs to let them explain what issues they face with the compliance library. If needed, Compliance rules should be tweaked to ensure they are following changing mandates, and are not too noisy with warnings. Any false positives reported should be investigated quickly.

2.     Follow up quickly with the PMs and ensure any changes made to compliance rules are properly understood. A check with the PMs to ensure they are not frustrated with a compliance rule that until yesterday was doing fine and now is not ‘cooperating’ can avoid frustration down the road.

3.     Keep things simple. Short to the point alert and warning messages are best for PMs. Ultimately a compliance message should help a PM clearly and quickly understand what the problem is so they can act swiftly to address it. Nothing annoys PMs more than a compliance message that confuses them into thinking the problem is elsewhere.

4.     Adjust the limits on compliance rules when needed. For example, if the business requirement to keep a particular cash level in portfolios changes, then the compliance rule also needs to be adjusted.

5.     Test to ensure high quality of the compliance library. If needed, get external help to ensure high quality in the compliance library. PMs are not fond of compliance rules popping up when they are putting in orders. But they are even more wary of false negatives. While false positives will annoy a PM, false negatives will make them lose trust in the compliance system.

6.     To improve efficiency, ensure proper boundaries for the compliance engine to run against, and an order monitor to check which orders are taking longer to send to trading. Compliance engines will run against a set of portfolios and open trades, sometimes called a basket, in a pre-trade compliance step. Therefore, it is possible for an order that has cleared compliance, but not yet been sent to trading, to generate a compliance alert when another order in the same basket goes through pre-trade compliance. PMs are not happy when their orders that have passed pre-trade compliance go through compliance checks again; sometimes it has taken the PM time to discuss with compliance and have the alert cleared. Therefore, it is important to set up a monitor to see which orders are taking longer to send to trading and inform the PM to send their orders to the trading desk when ready.

7.     If possible, give PMs the ability to preview compliance results in a ‘what-if’ compliance step so they can adjust the order rather than deal with compliance alerts and warnings later. Some OMS systems allow the PM to run compliance and display alerts without saving them. The idea is to give PMs a preview of the compliance run on their order and adjust it if they want to.

In sum, by better understanding the PMs perspective and making simple changes, the relationship between Compliance and PMs is strengthened. PM and Compliance teams working together ensure that the asset manager can pursue alpha generation in a more efficient manner while also not running afoul of regulations. In other words, the asset manager can achieve the best of both worlds.

For more information about Trade Compliance from a Portfolio Manager’s perspective, join IMP and a panel of experts for a webinar hosted by NSCP on June 7th at 2pm EST. Click here to register.