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This page was designed with our clients in mind.

So many times, our clients ask the same questions as their peer organizations. We found that it would be helpful to have a place for clients to have access to smart questions and answers from the pros. We post these questions anonymously and hope to help firms virtually. If you don’t see an answer to your question- use the search bar above to see relevant blog posts or chat one of our experts! Our experts can either quickly diagnose your problem OR can set up time to for a meeting to discuss your options. Sign up for our webinars easily at the bottom of this page.

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Compliance

Question 1: I have a rule that says “no borrowing- I MADE SURE TO INCLUDE NO NEGATIVE CASH IN MY RULE. AM I COVERED?

Answer 1: If this is an equity portfolio, then yes. If this is a fixed income portfolio I would say to prohibit reverse repos or security lending.

Question 2: What is the difference between net exposure and gross exposure

Answer 2: Usually the difference is Gross Takes the ABS (Absolute Value) of the position, whether it is short or long. Net will not.

“Ugly IMAs”

Question 1: Here is the language from the IMA of one of our institutional clients: “The manager shall mitigate risk by investing in primarily investment-grade securities. No unrated securities may be held except for issuers of demonstrable highest quality and in cases where the maturity rate of those securities qualifies them as overnight or short-term and in no case beyond 90 days maturity.”

Is this more than one rule? Also, they saying we can hold unrated securities only if the maturity is under 90 days?

Answer 1: If your rules engine can do this as a compound or combination rule, you can do one rule. You are testing more than one condition:

Condition one: “primarily investment grade securities.” Most firms will consider this 80%, but check for the standards at your firm. Note that this is not an average rating—it is saying that 80% of all securities held must be investment grade (not less than BBB-).

Condition two (in two parts): For unrated securities “issuers of demonstrable highest quality,” generally means issuers ranked AAA, US Treasuries and agencies. If a security is unrated, you can use the rating of the issuer instead, which will help for securities like commercial paper where the rating may not be readily available on the security but is available for the issuer. Also for unrated AND “in no case beyond 90 days maturity.” For this condition, you should be able to use the effective maturity of a security, which will take into account any maturity-shortening features of the security. For example, a variable rate security with a reset date within 7 days will have a 7-day maturity, even if its ultimate maturity is 2 years.

Question 2: “Collateralized securities must be rated in one of the three highest long-term ratings by an NRSRO and such collateral must be of the highest quality and greater than or equal to 102% of the security held.”

Answer 2: We would need to look through to the underlying holdings, unless you have an MBS that is guaranteed by Fannie Mae, Freddie, etc. For ABS, you’d need to look through to the guarantors of the underlying assets.

The 102% is alluding to Repurchase Agreements (repos). The collateral that the firm accepts would need to be AAA, and it would need to be worth more than 100% of the cash lent out, because a “haircut” is generally applied. That is, the collateral will have a discount applied to it. If the market value of the securities changed, it would create a margin call.

Not sure how to write these rules? Let us know the OMS you are using and we can walk you through it.

Front Office

QUESTION 1: What’s the best way to get requirements from my front office partners?

Answer: First, we’ll give you the WORST way. Have someone meet with them who knows little or nothing about what they do. Your PMs and Traders will give that person a cursory explanation and your project team will have a overly-simplified idea of what they need to deliver. After months of work, you’ll be showing your front office what you have set up for them. That’s when they will point out all of the workflows you missed and the changes they absolutely must have—which translates into missed deadlines and blown budgets.

Instead, find someone inside (or outside) your organization who understands the specifics of the strategy your front office team is using. For example, if you send someone to gather requirements for your tax-advantaged strategy, the interviewer should know what that means and have detailed knowledge about tax-advantaged instruments, like municipal bonds, and understand how information on new issues gets to the front office team. Not sure how to interview someone or what questions to ask? Contact us at info@impconsults.com and we’ll send you an interview worksheet.

Operating Management System (OMS)

Question 1: i have highlighted and annotated more requirements than i have rules in my oms- is something wrong? do i have gaps?

Answer 1: Not necessarily- A lot of times if an account is “allowed” to do something there won’t be an accompanying rule. You don’t want your OMS to be too restrictive. We would need to look at your source document language to make sure there aren’t any gaps.

Question 2: We have been talking about an upgrade to our system or potentially getting a new OMS completely. What should we do?

Answer 2: There is no cookie cutter response for this. Let’s set up a Zoom™ for this and discuss our options. In the meantime here is a blog article written by IMP that can help you narrow down your options: The Trade Order Management (OMS) Crossroad: Which way do we turn?

Data

Question 1: wHAT IS RULE DRIFT?

Answer 1: Rule drift can happen to anyone. As a firm’s number of accounts grow, months pass, and regulations come and go its hard to execute rule reviews or keep up with source documents. When an OMS is new the rules are fresh, but it is up to the organization to keep up with new regulations, source documents from their client, etc otherwise rules become dated, stale or irrelevant.