Establishing a combined risk compliance framework
New York-based PortfolioScience and Eze Software have joined forces to offer the marketplace a unique solution for fund managers: pre-trade compliance rules based on market risk.
The RiskAPI service, developed by PortfolioScience, is a fully hosted and customisable risk solution that integrates seamlessly with existing applications and programming frameworks to generate risk calculations for multi-asset, multi-currency portfolios and individual positions.
Eze Investment Suite, Eze Software's straight-through processing solution for the entire investment lifecycle, culls inefficiencies and replaces innumerable manual operations tasks by streamlining portfolio analytics, modelling, trading compliance and risk, from idea generation to settlement. The Portfolio Science application adds a layer of risk analytics to the order management workflow.
"That combination of being able to do risk analytics and pre-trade compliance in real time, as opposed to waiting for static reports once a day or once a week, really does change the execution-level risk landscape," comments Ittai Korin, President, PortfolioScience.
RiskAPI is a cloud-based engine, built from the ground up to be very dynamic. "The Eze Compliance engine interacts dynamically with RiskAPI and checks quantitative measures – in this case, risk measures – to ensure everything is running as it should be at the pre-trade compliance stage. Before the portfolio manager executes a set of trades, he can see what the new VaR would be for the portfolio, or what the correlation would to rates or oil. Then, with Eze Compliance's rules-checking engine, the team can decide whether to proceed or not, depending on the investment strategy's guidelines," Korin explains.
The engine can also be used for regulatory risk (beneficial ownership rules), diversification rules and ensuring compliance with proprietary strategies.
"Eze Compliance automates any rules the client puts in place and avoids the need for manual intervention. Our pre-trade compliance checks can prevent any trades from entering the trading system before they happen, if there was a risk of breaching limits. We also have a powerful post-trade compliance tool that clients use to determine how close they are to breaching limits at the end of the day, or intermittently throughout the day," explains Raya Gabry, Associate Director, Product Management at Eze Software.
In the UCITS world, funds have to implement a VaR rule on a pre-trade basis. Before any trade is executed, if it violates the VaR limit, the front-office cannot proceed. Therefore, from a regulatory perspective, it's vital for those wishing to diversify their fund range to implement a rules-based risk engine and be able to monitor each fund dynamically.
"One of the benefits of this integration is a solution to a very real need from a regulatory perspective," adds Gabry. "We have a large number of regulatory rules templates that can be easily assigned to the appropriate fund(s) and that makes it easy for clients to ensure that they are not breaching these regulatory requirements.
"With the RiskAPI integration, we can now take it a step further, where we can run rules on VaR at the pre-trade stage for UCITS funds."
Many smaller or mid-sized funds that want to get to the next level in terms of growth have to present themselves in the best possible light to institutional investors.
"With RiskAPI and Eze Compliance, fund managers can demonstrate there is a verifiable, repeatable risk compliance process in place," concludes Korin.