In recent months, we have begun to offer roundtable events focusing on important, evolving topics within the compliance world. These breakfast briefings are designed to be collaborative exchanges, and our recent two-part series addressed challenges posed by position limits and substantial shareholding.
A select and diverse group of investment managers were invited to each session, for the purpose of diving into details about these challenges that continue to frustrate holders of shares and derivatives in markets across the world. Below I’ll highlight the topics discussed by our attendees as well as Mike Marmo, the product head for CSS’ solution for substantial shareholding and position limits (Signal), and yours truly, CSS regulatory expert for the topics covered.
Position Limit Monitoring
In this session on position limit compliance, Mike and I went into depth on some common tripping points we have seen asset managers contend with, such as the following:
- Precisely assessing “spot month” effective periods
- Knowing which listed products aggregate into others for holdings calculation purposes
- Understanding “diminishing balance” calculations
- Considering proper contract ratios (such as for “mini contracts” held)
- Sourcing “open interest” data that can sometimes determine a position limit
These issues found a sympathetic audience among the roundtable participants, who didn’t hesitate to recount their own experiences and insights. Regarding spot month effective dates, for example, a compliance officer for a large US-based asset manager ($30 billion+ AUM) highlighted the importance of sourcing local exchange calendars to understand non-trading days such as holidays, rather than relying on data providers that may use only one calendar (e.g. New York banking calendar) to assess spot periods for all of its various positions. The officer also traded useful information with a compliance head at another large firm ($200 billion+ AUM) about whether and when to switch its sourcing of the spot period from the relevant product’s trading calendar (e.g. “First Business Day of the Contract Month”), to a specific calendar date published by the exchange (e.g. “September 3, 2019” if September 2 happens to be a non-trading day) which is often released several weeks prior to the spot period. A similar talking point was generated about “open interest” figures for listed products, which can determine position limit levels and are sometimes published shortly before position limit effective dates.
“Diminishing balance” requirements also sparked discussion, notably given the lack of useful guidance released by some exchanges. The relevant calculation, which allows a position holder to reflect a reduced position over time during the spot month or “delivery month” period, can be complicated by product aggregation requirements, as well as by adding or disposing of contracts held.
Future developments and improvements for position limit compliance were also considered. A compliance manager from a large firm ($500 billion+ AUM), for example, introduced the topic of pre-trade evaluation using “API calls,” which would allow portfolio managers to understand prospective holdings before positions are settled.
Substantial Shareholding Disclosure
Like the position limit discussion, the session on substantial shareholding struck a fairly even balance between regulatory and data concerns, while understanding that these two facets of compliance tend to overlap. Among the particular challenges Mike and I addressed in depth were the following:
- Understanding and sourcing the required “denominator”(issuer outstanding shares amount) for calculation of ownership percentage held
- Sourcing proper third-party reference data
- Looking through to constituents of index products and ETFs held
- Notification procedures
- Requirements for aggregation across funds and investment manager entities
A compliance officer from a mid-sized manager ($5 billion+ AUM) immediately sparked discussion by posing a commonly heard question: How do you keep up with the regulatory requirements in all of the jurisdictions in which you invest? The responses largely depended on the internal compliance resources available within each attendee’s firm, yet a frequent refrain was that using an outside source for compliance information and efficiencies – be it a law firm, consultant, software vendor or all of the above – is essential in tackling this challenge if you hold securities listed in multiple countries. The compliance officer pointed to obtaining accurate “shares outstanding” amounts as a particularly vexing aspect of this challenge across various jurisdictions, as it presents both a regulatory question (which source must be used?) and a data sourcing hurdle (how can we efficiently ingest this required data?), which must be answered to arrive at an accurate percentage of ownership held in a relevant issuer.
The discussion evolved into sourcing regulatory reference data, which includes information such as lists of issuers involved in a takeover bid (which can trigger threshold filing requirements as low as 1%), European securities lists for the purpose of understanding trading venues (such as ESMA’s FIRDS, and “Exempted Shares” list for short selling purposes), Hong Kong’s “Designated Securities” list, and Belgium’s list of issuer-imposed thresholds. The above-mentioned compliance officer, as well as another firm’s ($10 billion+ AUM) compliance manager, emphasized in particular the need for accurate reference data when investing in “sensitive industries.” With threshold investing limits imposed by various agencies within any given country, for investing in commonly protected industries such as telecom, mining, armaments, transport and media, holders of securities must understand which issuers fall into the relevant categories. As the latter compliance manager recounted from experience, holding a 10% stake in an airline, for example, can potentially cause the investor to itself be considered an “airline” under a strict jurisdiction’s laws. And as another compliance manager from a smaller investment manager ($200 million+ AUM) observed, such unpredictability makes it difficult even to know the regulator or agency whose rules must be followed.
That attendee from the niche firm, as well as others at the table, also traded information about how to submit disclosures, once having reached a filing threshold. A gamut of experiences was recounted: from the firm with modest holdings that may initially prefer to understand only the black-letter regulatory information (confirming that its holdings do not approach any filing thresholds), to the larger asset manager that files with regulators frequently and also wants to stay abreast of higher thresholds at which public disclosures may be required.
Mike and I viewed these roundtable sessions as a tremendous success, as did CSS, leaving no doubt that we’ll be conducting several more in the near future. We were glad to hear the participants’ feedback confirming this, and we look forward to more fruitful discussions. Can we still improve? Always. For example, some attendees desired even more interaction, in less scripted blocks of time. Duly noted! As always, thanks for reading, and if you’re interested in learning more about our position limit monitoring and shareholding disclosure solution, feel free to visit our Signal page or contact us directly.
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CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.