(by Thea George, STP Magazine, May 2003)

Canadian asset manager TDAM has created a Policy Risk Group to take responsibility for the running of the LatentZero compliance system it is implementing this year.

Canadian Asset Management inc (TDAM) has selected LatentZero's Sentinel Portfolio compliance software to assist in meeting the real-time pre-and-post trade compliance needs of the TDAM business. According to Mike Thorfinnson, chief risk officer and chief operating officer at TD Asset Management, phase one of the Sentinel implementation (going live this summer) will focus on post-trade compliance, and in phase two of the project (begin inning in late 2003) the pre-trade compliance functionality of the software will be implemented.

Thorfinnson explains that a number of factors drove TDAM's deicing to invest in Sentinel. A key driver is the demanding regulatory environment in which TDAM operates. "There is increased scrutiny of asset managers, and we are required to ensure that on a regular basis we are reviewing our portfolios versus our mandates," he says. "We came to the realization that there are so many very specialist elements in the regulatory requirements we must adhere that we needed to put more process around capturing those subtleties and ensuring that they are accounted for."

In addition, TDAM wanted to increase its capability to stop compliance errors before they happen, Thorfinnson says. Another driver was to improve the consistency of the application of automated portfolio compliance checking, he adds. "TDAM has grown. Some of the asset management business units have grown organically and some through acquisition. The result is we operate in a number of asset management niches, which means there are different identifiable business units within TDAM," he says. As a consequence there is some overlap in the way we in which the risk management function is undertaken between the business units, with different units employing different legal counsel and using different practices to meet regulatory requirements, for example. "Because all of our divisions form part off the same legal entity, we needed to automate portfolio compliance in one area and ensure it was consistently applied," Thorfinnson explains.

"We have not removed the compliance responsibilities of the portfolio managers or business units, but have created a centralized function to provide more thorough independent checks."

Thorfinnson has also instigated some structural change which he believes will be vital to guarantee the implementation of Sentinel meets TDAM's requirements. "This arrangement only works if there is clear accountability and responsibility within a group to manage a process and system like this on an ongoing basis," he explains. A new Policy Risk Group has therefore been created to take responsibility for the running of Sentinel. "If there are changes to mandates they flow through this group, and this group is a centre of expertise for regulatory issues," Thorfinnson adds. The new group comprises a variety of people, some of whom were formerly working with the other compliance systems TDAM has in place, as well as some new members of staff. "We realized we have to invest money in this area, despite the economic climate," he says.

Another vital element for the success of the implementation of Sentinel is a separate data management project underway at TDAM, Thorfinnson believes.

"We are drawing on information from systems within all the different business units, they have different accounting and trading systems because they have taken the best of breed approach. There is therefore a need to bring data into a central place.

"Key to success of a project like our compliance project is making sure there is good data. We need a really bullet proof data management structure. We have been building a data hub for some time and we are ensuring this data hub is really up to speed and can feed information into the LatentZero system. It's a different project, but it's also a critical component of the Sentinel project," he explains.

The understanding on the part of the LatentZero team of the importance of the data element was among the reasons why TDAM selected the Sentinel product over the other compliance solutions it examined, Thorfinnson says. "That shows a degree of experience and understanding of the key success factors for implementing the system," he adds. "They also knew our functional requirements, and their technology is robust. In addition, they are focused first and foremost on compliance, rather than compliance being a modular component of a larger portfolio management offering. Because of their compliance focus, LatentZero are used to interfacing wit other systems." Thorfinnson adds that during a visit he made to LatentZero in February, he was impressed to find the vendor employs people who focus on staying up to date with the regulatory requirements affecting clients and translating them into the rules of the system.

From a functionality perspective, he continues, "there is pre-trade functionality in Sentinel that we never saw anywhere else". The strength of the system's post-trade compliance functionality is also vital, however, ass Thorfinnson points out, "Pre-trade compliance is what everyone is talking about, but much of the payback is in post-trade. If you can capture 99 per cent of errors on the day after they occur, you will save a large proportion of the costs".