Strategic Context

In the evolving landscape of institutional asset management, the ability to access global markets and execute sophisticated investment strategies has become increasingly crucial. This case study examines how a mid-sized asset manager, traditionally focused on developed markets’ long-only equities, transformed their trading platform to support complex derivative instruments including swaps and participatory notes (P-Notes).

The firm’s strategic objectives included expanding beyond developed markets, implementing more sophisticated investment strategies, and optimizing execution costs. Their existing infrastructure, while robust for traditional equities, required significant enhancement to support these new capabilities.

Business Drivers

The expansion initiative was driven by two primary requirements. First, the firm’s hedge fund strategies needed more precise hedging capabilities beyond traditional options trading. Total return swaps offered a more cost-effective and targeted approach to implementing long/short strategies. Second, the firm sought access to India’s dynamic securities market through P-Notes, providing exposure to this key emerging market while navigating its complex regulatory framework.

Implementation Scope

The project required comprehensive modifications across the entire trading ecosystem:

Order Management System Enhancement

The OMS transformation focused on supporting new instrument types while maintaining existing workflows. Key developments included new order capture screens for swap and P-Note trading, with specific fields for:

  • Underlying security details
  • Swap terms and conditions
  • Counterparty information
  • Financing rates
  • Reset and payment schedules
  • P-Note issuer details
  • Reference price mechanisms
  • Settlement instructions

Compliance Engine Evolution

Perhaps the most complex aspect was enhancing the compliance engine to handle the unique characteristics of derivative instruments. The system needed to:

  • Implement look-through capabilities for underlying exposures
  • Monitor counterparty risk limits
  • Track comingled issuer concentrations
  • Enforce regulatory restrictions at underlying instruments
  • Reporting enhancements

Operational Workflow Implementation

The project necessitated close collaboration with multiple stakeholders to design and implement new operational workflows:

Trading Operations

Working closely with traders, we established processes for:

  • Swap trade lifecycle management
  • P-Note order routing protocols
  • Trade confirmation procedures
  • Position reconciliation
  • Corporate action processing

Investment Operations

The operations team required new procedures for:

  • Collateral management
  • Margin monitoring
  • Reset calculations

Extensive collaboration with legal and compliance teams enabled:

  • P-Note registration with three major brokers
  • ISDA agreement management
  • Regulatory reporting procedures
  • Risk limit monitoring
  • Compliance rule implementation

Technical Solution

The technical solution focused on modifying existing systems rather than implementing new platforms, requiring:

  • Enhanced data models for derivative instruments
  • Modified order capture interfaces
  • Expanded compliance rule engine
  • New reporting frameworks
  • Updated position keeping systems
  • Enhanced reconciliation processes

Results and Impact

The platform enhancement delivered significant benefits:

  • Enabled access to Indian securities market through P-Notes
  • Improved hedging efficiency through swap capabilities
  • Reduced execution costs for long/short strategies
  • Enhanced risk management capabilities
  • Streamlined operational workflows
  • Improved regulatory compliance

The successful implementation of swap and P-Note trading capabilities marked a significant milestone in the firm’s evolution, enabling sophisticated investment strategies and global market access while maintaining robust risk management and operational efficiency.