Compliance Data Model: Asset Tree


The power of a structured compliance system data model design is often underestimated. Set-up correctly, it can be a source of quality and efficiency for Asset Managers Investment Compliance Monitoring and Coding programme. Asset Manager’s compliance systems often live off historic data models built for Front Office purposes, which are not fit for purpose for compliance rule coding. This results in overly complex rule coding with coding workarounds to accommodate the deficiencies of the data model, a lack of consistency and standards in coding, and consequently, increased investment guideline breach risk.

Compliance Data Model

A fundamental element of an accurately functioning Investment Guideline system is a well-designed Compliance Data Model (CDM). The critical component of the CDM is the Compliance Asset Tree or Instrument Hierarchy. This paper discusses the importance of a thoroughly thought through and executed Compliance Asset Tree.

A well-defined Asset Tree can be used in each compliance rule to define the universe of instrument types the rule relates to and therefore is the golden pillar on which each rule should be constructed (i.e. the building block of compliance rule syntax).  The bottom tier of the Asset Tree is used to classify every asset or security held at an asset manager from the agreed list of values. The bottom tier values are then grouped appropriately together to form the higher tiers of the Asset Tree. These groupings or higher levels are arranged to facilitate the definition of the required building blocks of coding, typically in a three tier “Asset Tree” with interlinked tiers within the asset managers compliance systems data model.

Compliance Data Model Design Principles

The granularity of the Asset Tree is driven by the variety of instrument types held within the universe of the asset manager’s portfolios. At the most granular level, the individual asset types (Tier 3) are set-up as asset identifiers (e.g. Macros in Blackrock Aladdin, Security Types in Charles River (CRD), or Asset Sub-classes in thinkFolio) in the compliance system. These are in turn grouped into distinct mutually exclusive buckets (Tier 2) which are also set-up as “asset identifier buckets”.

Our recommended Asset Tree is formed of three distinct tiers:

  • Tier 1: Provides the highest-level grouping. For example; Debt, Equity, Funds, Derivatives, Cash and Cash Equivalents
  • Tier 2: Provides a sub-grouping. For example, Tier 1 Debt is sub-divided into Tier 2 bond types such as Securitised Bonds, Government Bonds, Quasi Government Bonds, Supranational Bonds and Corporate Bonds
  • Tier 3: Provides the most granular level of asset types required. For example, Tier 2 Government Bonds is sub-divided into the individual constituents of government bond types such as treasury-bills, sovereign bonds, government index linked bonds.

As mentioned above, Compliance System Identifiers will be set up for each tier in the Asset Tree to allow for simple, efficient, and future-proofed rule coding. The coder will no longer have to code complex, multiple line syntax, but instead can target individual instrument types or groups of instrument types simply by selecting the appropriate level of granularity required. For example, “Do not invest in debt” can now be coded to point at Compliance Tier 1 Debt. Compliance Tier 2 allow for targeting of smaller sub sets of instruments and so on.

Other important design features of a best practice Asset Tree include:

1. Mutual Exclusivity: The groupings of instruments at Compliance Tier 1 & 2 must be mutually exclusive. This is required from a coding perspective to allow for distinct bucketing of instruments. For example, a multi-asset mandate may have separate equity and debt guideline ranges, which require mutually exclusive instrument bucketing for monitoring to be accurately conducted.

2. Asset Tree Composition: The design should be based on the following factors:

  • Generally accepted industry definitions of instrument type blocks
  • Compliance rule coding requirements
  • Cross departmentally agreed, asset manager in-house definitions of instrument types
  • Regulatory instrument type definitions, although there are exceptions to this as client definitions in some instances differ from regulatory definitions, and jurisdictional definitions sometimes differ (Regulatory specific definitions have their own definitions used in regulatory rules).

3. Asset Tree Coverage Level: Groups of instruments are composed based on the instrument type rather than the underlying instrument type or exposure. A separate exposure Asset Tree can be designed based on underlying asset type exposure.
4. Asset Tree Design Basis: Is to be defined on Instrument type definitions, rather than security attributes. There are additional identifiers that will be used to capture specific security attributes where this is required. For example, country of risk.
5. Scope of Asset Tree: Is based on asset profile of the asset manager. It is important that the Asset Tree is designed to the required granularity, taking into account;

  • Instruments approved for trading across the business
  • Instruments that the portfolio managers are in the process of gaining approval to hold or plan to seek approval to hold in the near to medium term
  • Instruments types held previously and currently in the asset managers portfolios
  • Instrument types referred to in investment guidelines.

Exposure Asset Tree

In addition to an Asset Tree structured purely on instrument types, an Exposure Asset Tree, considering the underlying instrument types of derivatives, may be required for coding purposes. This combines Compliance Tier 3 from different Compliance Tier 2 groupings based on underlying instrument type exposure.  For example, the definition of equity exposure, as shown in the below example, can mean direct equity holdings, single name equity derivatives, equity index derivatives, and equity funds. Using the below example, a compliance rule that requires the inclusion of equity exposure can be coded simply by using an Equity Exposure asset identifier, which will select all securities with the correct (predefined) equity identifiers in the compliance system.

Questions Asset Managers should ask themselves regarding their existing Compliance Asset Tree

    1. Is a coherent instrument classification structure currently in place?
    2. Is each required component of the lowest level of the existing Asset Tree identifiable in the Compliance System?
    3. Are the asset identifiers used in rules systematically applied? For example, where guidelines state Equity, are equity instruments always identified consistently through the same identifier (for example investment class or security type in Charles River) in all compliance rules?
    4. Is there overlap within Instrument groupings? For example, does the identifier for Corporate Bonds also include ABS/MBS, which may lead to over-complicated coding? Components of the Asset Tree must be mutually exclusive.
    5. Are there any instrument types that are currently not identifiable through compliance system data, which means no coverage?
    6. Does the current Asset Tree structure cover proposed new instrument types?
    7. Are all Asset Tree classifications defined automatically using third party data or are some manually maintained? Manually assigning data can lead to inconsistencies in assignments between similar securities.

How can Alpha help?

Current Compliance Asset Tree Assessment: Examine whether a coherent compliance asset classification structure currently exists in your compliance system. We can assess how the lowest level of instrument classifications and groups of instrument classifications (i.e. the building blocks of compliance rule syntax) used in rule coding are current structured. We will measure;

  • Completeness – Do all held securities have a value assigned or are some not classified?
  • Granularity – Do the current lowest level classifications have the required granularity to meet the compliance requirements?
  • Accuracy – Are instruments being classified as expected?
  • Automation – Are the required components of the Asset Tree automatically identifiable through the asset managers current security data or is it a manual process?
    Groupings – How do the higher levels of the existing Asset Tree groupings compare against industry standards?
  • Efficiency – Does the current Asset Tree allow for efficient rule coding?
  • Consistency – Are all instruments in each asset type classified consistently? For example, we would expect all Equity REITS to be classified as such. We would not expect half of Equity REITS to be Ordinary Shares and the other half as Equity REITS.

Data Model Design: Develop a new compliance Asset Tree based on generally accepted industry definitions of instrument type blocks, the specific requirements of your compliance rule coding, cross departmentally agreed client definitions, and regulatory definitions.

Data Model Build: We can determine the correct data points (Bloomberg, Reuters, Barclays etc) required to identify securities and instrument groupings within the Asset Tree utilising your existing third party data set and advise where additional data points if required. Once developed, we can test that each component of the Asset Tree works in practise against your actual security data.