One of the challenges of compliance in the investment industry is certainly given by rules and regulations. Of course, they are necessary, particularly at the institutional level, among other things to order and set the bases for legitimacy and boundaries of investment actions in a given economic space. However, despite the general regulatory umbrella these might provide, there are also fund-level rules that Fund Management Companies (FMCs) must follow in their activities.
Meeting the needs of both FMCs and depositary banks in their respective capacities, Depowise features an Investment Limit Check module enabling the easy verification of investment portfolio’s compliance with both fund-level and institutional-level rules. Through automation and flexibility, the module actively contributes to strengthening the relationship between investors and fund managers, and between the audited and the auditors.
The pains of dealing with clustered regulations
To understand the crucial benefits provided to this type of activity by automation, let’s first take a look at the layers of rules that fund and asset managers are required to comply with. Yes, we know they can be quite many, and we know the risks involved with not sticking to those boundaries.
Generally, Fund Management Companies are faced with two different sets of rules that can be identified at two different levels. In the wider, European framework we have two main directives – one on Undertakings for the Collective Investment in Transferable Securities (UCITS), and one for Alternative Investment Fund Managers (AIMF). On a smaller scale, we find instead fund-level rules that are shaped by a specific prospectus relevant to the fund in question.
The picture that emerges is of clustered rules and regulations, making compliance duties trickier to meet. And if investment limits monitoring is not automated or, even worse, is done manually, a relatively simple task can become needlessly time-consuming and resource-intensive.
It does not really matter whether FMCs manages to be compliant with either one of this set of rules. All calculations and investment strategies pursued must be in check and take place within the pooled limits set. To give an example, at the fund-level these might account for the varying percentage allocated to different investment typologies or asset classes. Consequently, compliance is not only a matter of auditors versus audited, but also of trust and accountability between investors and FMCs.
Customizable limits in a highly adaptive software environment
High flexibility is the core feature of this module. The rules engine is configurable and customizable, ensuring responsiveness to regulatory changes. Moreover, this enables fund and asset managers to incorporate investment principles lined out in the fund’s prospectus accordingly. FMCs can tailor limit checks on their own needs and portfolio strategies, giving customers further guarantees and trust on safeguarding the rules agreed upon. Depowise rules engine includes tools to build all required restriction rules without the knowledge of programming – let them be industry, country or issuer based, exposure or asset allocation based or any other type.
The Investment Limits Monitoring interface and widget is another shining example of how, with the help of technology, oversight and compliance monitoring can be made simple. Currently, this kind of maintenance tasks is still eating up valuable economic and human resources that both FMCs and depositary banks could deploy for other activities. If a software can do the job for you, choose to intervene only when necessary – and only when your work truly adds significant value to the business process.
Automation makes compliance and accountability easy to achieve
Pursuing investment strategies that are compliant with these limits, as a result, becomes a bit of a maintenance task. Why so? Because at the institutional level, there is no room for changes, negotiations, exceptions – that is what the directive says, and that is how it needs to be done. At the fund-level instead, even though portfolio-specific rules and plans might change, these are still generally set already when investors opt-in. Actually, certain funds might prevail over others in light of investors’ choices precisely because of those rules. For example, they might best meet the investors’ risk profile or asset management preferences.
The resulting horizontal value chain in the industry shows how this monitoring task holds FMCs accountable towards both their investors and auditing authorities. To the end of dramatically simplifying fund and asset managers’ life in investment limits compliance, the Depowise Investment Limit Check module does most of the work for them.
The software runs configured limit checks automatically – pre-trade, post-trade or post NAV, pitting trading operations and numbers against both the institutional- and fund-level rules. Every time limits are in reach, i.e. the set limits are exceeded, Depowise notifies the fund manager. The visual cue displayed on the interface is target-oriented, allowing users to intervene directly on the issue at hand – no matter if related to the general regulatory framework or portfolio-specific rules.
Interested in hearing more about how Depowise could benefit your company?
Let’s talk Depowise in greater detail. Contact our Founder and Solution Architect, Sven Peekmann, at email@example.com. We will arrange a demo and show you how the solution could benefit your bank or Fund Management Company.
Co-authored by Federico Plantera