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PURPOSE
This document is to illustrate the setup of compliance rules in CS Lucas system.
WHY IS THIS IMPORTANT?
To enable the system to perform pre-trade compliance check based on rules that user has defined to track risk exposure.
TYPE OF RULES
In this guide, we will set up different risk profiles, tagging and rules to track compliance to the following risks.
1. Limit exposure to counterparty group
2. Limit exposure to risk country
3. Limit exposure by counterparty credit rating
4. Limit money market maturity tenor by counterparty type
User may change the risk profile in the above examples to create other rules. For example, Rule 2 can be changed to risk currency by changing the risk profile from country to currency.
RULE 1
Example: Amount invested in BMW Group must be less than GBP30M.
1.1 Set up Risk Profile
From Set Up > Risk > Risk Profile.
For New Risk Profile, select “Choice”.
In the Description Field, enter “Counterparty Group”.
Click on the + sign.
Enter selection choices for Counterparty Group risk profile. In this example, “BMW Group”.
Click Save.
1.2 Tag Security
From Set Up > Static > Securities.
Select the Security Type and click Refresh to view list of securities.
Drill down on the security. In this example, BMW 3.5% 5/20.
Click on Risk Profile.
Select Counterparty Group.
Choose the desired counterparty group from the Counterparty Group drop down list. In this example, BMW Group is selected.
Click Update.
1.3 Set up Compliance Rule
From Set Up > Risk > Compliance.
Click New.
Enter the following details as shown below for Shortname*, Description* and Alert Type*.
Select Rule Type* as Grouped by Ctpy.
Select Counterparty Group for Risk Profile*. The system will require additional selection for choice of this counterparty group.
Select BMW Group.
For the limit set as below.
The completed values are as shown below.
RULE 2
Example: Amount invested in Netherland must be less than GBP35M.
2.1 Set up Risk Profile
From Set Up > Risk > Risk Profile.
For New Risk Profile, select “Choice”.
In the Description Field, enter “Country Risk”.
Click on the + sign.
Enter selection choices for Country Risk profile. In this example, “Netherland”.
Click Save.
2.2 Tag Security
From Set Up > Static > Securities.
Select the Security Type and click Refresh to view list of securities.
Drill down on the security. In this example, Philips 3% 2/18.
Click on Risk Profile.
Select Country Risk.
Choose the desired country from the Country Risk drop down list. In this example, Netherland is selected.
Click Update.
2.3 Set up Compliance Rule
From Set Up > Risk > Compliance.
Click New.
Enter the following details as shown below for Shortname*, Description* and Alert Type*.
Select Rule Type* as Risk Profile.
Select Counterparty Risk for Risk Profile*. The system will require additional selection for choice of this Counterparty Risk.
Select Netherland.
For the limit set as below.
The completed values are as shown below.
RULE 3
Example: Amount invested with rating EEE are disallowed.
3.1 Set up Risk Profile
From Set Up > Risk > Risk Profile.
For New Risk Profile, select “Ranking”.
In the Description Field, enter “Credit Rating”.
Click on the + sign.
Enter selection choices for Credit Rating profile.
Click Save.
3.2 Tag Security
From Set Up > Static > Securities.
Select the Security Type and click Refresh to view list of securities.
Drill down on the security. In this example, Bloggs plc 5.5% 9/23.
Click on Risk Profile.
Select Credit Rating.
Choose the credit rating from the Credit Rating drop down list. In this example, EEE is selected.
Click Update.
3.3 Set up Compliance Rule
From Set Up > Risk > Compliance.
Click New.
Enter the following details as shown below for Shortname*, Description* and Alert Type*.
Select Rule Type* as Risk Profile.
Select Credit Rating for Risk Profile*. The system will require additional selection for range of credit ratings.
Select EEE for credit rating From* and To*.
For the limit set as below.
The completed values are as shown below.
RULE 4
Example: Amount invested for longer than 364 days must be less than GBP5M.
4.1 Set up Risk Profile
From Set Up > Risk > Risk Profile.
For New Risk Profile, select “Choice”.
In the Description Field, enter “MM Counterparty”.
Click on the + sign.
Enter selection choices for MM Counterparty risk profile. In this example, “Local Bank” and “Foreign Bank”.
Click Save.
4.2 Tag Counterparty
From Set Up > Static > Counterparty.
Select a bank. In this example, BARC-LN.
Click on Risk Profile.
Select MM Counterparty.
Choose the desired MM counterparty type. In this example, Local Bank is selected.
Click Update.
4.3 Set up Compliance Rule
From Set Up > Risk > Compliance.
Click New.
Enter the following details as shown below for Shortname*, Description* and Alert Type*.
Select Rule Type* as Maturity Ladder.
Select MM Counterparty for Risk Profile*. The system will require additional selection for choice of this
counterparty.
For the limit set as below.
Click + to add tenor and limit.
The completed values are as shown below.
FREQUENTLY ASKED QUESTIONS
FAQ01. What is the difference between a hard block, soft block and warning?
When a compliance rule is set up, it can be marked as either a hard block, soft block or warning. This tagging will affect the handling of the pre-trade transaction that cause a compliance breach.
A hard block
When the system encounter a breach on a hard block, the user will not be allowed to continue with the pre-trade transaction.
A soft block
A soft block rule allows a user to continue with the trade provided the user has the permission to proceed on soft block. The permission required is 15014 Book Investment with breach warnings.
A warning
A warning rule always allows a user to continue with the transactions. Permission 15014 Book Investment with breach warnings is not required.
FAQ02. How does the system handle hard blocks, soft blocks and warnings when multiple compliance rules breach occur?
The severity of a breach are ranked as follows:
– warning
– soft block
– hard block
A pre-trade transaction may cause multiple rules in a compliance rule group to breach. The severity of the breach of that compliance group will be set to the highest of the breached rule.
Eg:
Rule 1 – Warning
Rule 2 – Warning
Rule 3 – Soft block
The pre-trade breach of the compliance rule group will be dealt with a soft-block because of Rule 3.
FAQ03. What is the difference between a strict and adaptive pre-trade compliance check?
When a user attempts to book a trade, the system run a compliance check based on the rules to apply for that portfolio. The check will determine the risk exposure before and after the trade.
Strict and adaptive compliance check setting is used to determine how the system should interpret the test results.
Strict
Under a strict compliance check setting, only the “after” result is used to determine whether the check passes or fails.
Example:
Adaptive
Under an adaptive compliance check setting, the overall result is determined in two stages:
i) Whether post trade pass or fail,
ii) If i) fails, then it tests whether the post trade aggravates or alleviate the exposure. If it aggravates, the fail status remains. But if it alleviates the exposure then the test is deemed to pass.
Example 2A
An adaptive test has the advantage of providing flexibility in managing pre-existing or technical compliance breach.
RELATED INFORMATION
CHANGE HISTORY
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