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Execute fully compliant client orders with dynamic pre-trade checks on instrument level

  • Cross-Border
  • Cross-Border Instruments
  • Suitability
  • Asset Management
  • Investment Banking
  • Wealth Management

In this use case, we describe the difficulties with pre-trade checks for the execution of client orders and line out embedded solutions for fully automated and semi-automated processes.

Clients:

Partners:

Coverage
  • 100+ jurisdictions
  • 348+ rules per country (avg.)
Scope
  • MiFID II (EU), FIDLEG (CHE), FAA (SGP)
  • IFA (ITA), UCITS, AIFM, FinSA
  • and more
Avaliability
  • App, API
Cross-Border Instruments

Our retail clients can trade thousands of investment products with our online trading tool. Are there any regulatory restrictions applying?

Cross-Border Instruments

My China-based HNWI client is asking me to sell his position in a specific structured product. Are there specific compliance restrictions I should be aware of?

Cross-Border Instruments

How can we block restricted securities in our online trading system?

Cross-Border Instruments

One of my Mexican clients sent an equity buy order via email, can I execute the order directly or are there any additional regulatory requirements I need to clarify?

Ensuring compliant trade execution today

When a relationship manager receives a buy/sell request for a specific product or the trading desk is executing orders on the client’s behalf, they need to decide if this order can be placed or not.  On the one hand, regulatory restrictions must be taken into account, too often in a manual and time-consuming process. On the other hand, traders have to move as quickly as possible because market prices can fluctuate fast, impacting the best execution for the client.

Because compliance checks take time, traders in some cases go ahead without regulatory due diligence related to the client or their domicile country and simply rely on reverse solicitation exceptions. This simplification poses a risk of the trade getting blocked at a later stage or even worse – the transaction being reversed. Both mean disappointment of the client and could cause material costs to the organisation. Also, falsely executed trades could even lead to major compliance and reputational issues.

In case of uncertainty,  relationship managers or the execution desk typically involves their legal or compliance department. The compliance department in most cases relies on a base knowledge normally available in paper form (pdfs, memos etc.). Larger organisations could have rules directly embedded in their trading systems only to then face the challenge of losing transparency, clear ownership and speed of updates of these embedded rules.

The challenge of regulations and compliant trade execution

As described, maintenance and especially access to regulatory knowledge with traditional paper-based manuals and procedures is slow and costly. Hard-coding regulatory restrictions into trading systems could be a solution. However, it’s not uncommon for such hard-coded rules to stop relationship managers and clients from trading instruments they would be allowed to trade but are blocked nevertheless. The reason: few rule management tools can handle the complexity of global regulations and therefore, most organisations apply simplified and therefore too restrictive rules.

The result: banks and their trading desks chose the time-intensive conservative approach when minimising their risk exposure. They rely on manual processes that create bottlenecks at legal and compliance levels and are inefficient with recurring questions clogging up the entire system.

To face the challenge banks can take either of the three directions:

Business potential Risk minimisation Scalability Launch speed
Rely on Reverse Solicitation or similar exemption ++++ + ++++ ++++
Carry out regular compliance trainings and post-trade compliance spot-checks ++ +++ + +
Embed automated trade execution checks on instrument level ++++ ++++ ++++ ++++

Introducing dynamic trade execution checks on instrument level

Today’s technology allows quick and accurate pre-trade checks directly integrated with the trading execution systems. The integration of such checks, first of all, requires accurate digital compliance rules that are always up to date and on which an organization can rely on. Furthermore, the technology needs to bring a full level of transparency for the rule owners such as compliance teams to maintain the rules and for IT to support the implementation process. To fully automate the compliance checks an initial mapping of the relevant product attributes needs to be conducted. 

If a full integration into the trading process is not available, the relationship manager can do dynamic pre-trade checks in a separate regulatory app that answers the recurring and also complex questions regarding restrictions and requirements for trade execution. 

In a nutshell, the main factors for an efficient and compliant pre-trade compliance check are:

  • Up to date digital regulatory knowledge in the form of single rules and rule sets. 
  • A Rule maintenance system to ensure full transparency for business, legal and compliance as well as for audit purposes.
  • An easy to integrate API option or a stand-alone app that allows either integration of the rules or provides a simple compliance tool for relationship managers.

Benefits of dynamic trade execution checks on instrument level

The digital compliance rules do not only allow cost- and time-efficient automated pre-trade checks but as soon as the regulatory knowledge is available in a digital form it can also be provided to relationship managers to empower them and avoid bottlenecks with recurring questions to legal and compliance.

With integrated and automated checks clients can trade a larger investment universe and at the same time, the bank can reduce trade errors. Client expectations can be fulfilled and even exceeded to strengthen trust from the very beginning.