casemark/conducting-pre-trade-compliance-checks

Conducting Pre Trade Compliance Checks

Structures pre-trade compliance workflows covering restricted list screening, position and concentration limit verification, and regulatory constraint checks before order submission.

When To Use

• Before submitting any order to verify the trade does not violate firm or regulatory constraints
• When onboarding a new security or counterparty to confirm it is not on a restricted or watch list
• When a trader or PM requests a compliance greenlight on a proposed position change
• During periodic review of standing orders or strategy-level allocations against updated restricted lists
• When market conditions or corporate events (e.g., MNPI receipt, blackout periods) trigger re-screening

Inputs To Gather

• Proposed trade details: security identifier (CUSIP/ISIN/ticker), side (buy/sell/short), notional or share quantity, order type, account/fund
• Restricted and watch lists: firm restricted list, issuer-level watch list, MNPI-flagged names, sanctions lists (OFAC SDN, EU consolidated list) [VERIFY applicable sanctions regimes]
• Current portfolio positions: existing holdings in the security and correlated instruments across all accounts
• Position and concentration limits: regulatory limits (e.g., 13D/13G 5% beneficial ownership threshold, Reg SHO locate requirements), fund mandate limits, internal risk limits, single-issuer concentration caps [VERIFY fund-specific or strategy-specific thresholds]
• Regulatory calendars: blackout windows, quiet periods, earnings-related trading restrictions
• Client or account restrictions: IPS constraints, ESG exclusion lists, sector/country prohibitions

Workflow

1. Identify the trade and account context

   • Confirm security identifier, direction, size, and target account
   • Determine whether the account is discretionary, advisory, or proprietary — each may carry different compliance rules

2. Screen against restricted and watch lists

   • Check the security and its issuer against the firm restricted list and any MNPI-flagged names
   • Screen the counterparty (if OTC) and the issuer against OFAC SDN, sectoral sanctions, and any jurisdiction-specific denied-party lists [VERIFY which sanctions programs apply]
   • If the security is on the watch list (not restricted), flag for enhanced monitoring but do not auto-block
   • Document the list version/date used for screening

3. Verify position and ownership limits

   • Calculate the pro-forma position (current holdings + proposed trade) across all accounts under common control
   • Check against regulatory ownership thresholds: 5% beneficial ownership (13D/13G), 10% short-swing profit (Section 16), exchange position limits [VERIFY exchange-specific limits for derivatives]
   • Confirm the trade does not breach fund-level concentration limits (single issuer, sector, geography, liquidity bucket)

4. Check short-sale and locate compliance

   • For short sales, confirm a valid locate has been obtained per Reg SHO Rule 203(b) [VERIFY if the security is on the threshold list or is hard-to-borrow]
   • Verify the security is not subject to an active short-sale circuit breaker (Rule 201 alternative uptick)

5. Validate against trading window and blackout restrictions

   • Confirm the firm is not in a blackout or quiet period for the issuer
   • Cross-check personal trading pre-clearance if the order is from a covered person under the firm's Code of Ethics

6. Apply account-level and mandate restrictions

   • Verify the trade is consistent with the investment policy statement, prospectus limits, or client guidelines
   • Screen against ESG exclusion lists and sector/country prohibitions if applicable

7. Record the compliance determination

   • Stamp the order with a compliance pass/fail/conditional result and timestamp
   • If conditional, specify the remediation needed (e.g., reduce size below threshold, obtain locate confirmation)
   • Archive the screening evidence for audit trail purposes

Output

• Compliance determination: clear pass, fail (with blocking reason), or conditional approval with required remediation steps
• Screening log: list of each check performed, data sources used, list versions/dates, and result per check
• Flagged items: any watch-list hits, near-limit warnings, or items requiring enhanced monitoring
• Exception escalation memo (if needed): narrative explaining the issue, relevant rule or policy, and recommended resolution for compliance officer review

Quality Checks

• Confirm all security identifiers were resolved correctly — ticker aliases and class shares can cause false negatives
• Verify restricted list and sanctions list versions are current (stale lists are a common audit finding)
• Ensure pro-forma position calculations include all accounts under common beneficial ownership, not just the requesting account
• Cross-check that the compliance timestamp precedes the order submission timestamp in the audit trail
• For any [VERIFY] items, confirm resolution before releasing the order — do not default to pass on unresolved flags
• Escalate to the Chief Compliance Officer when a proposed trade is within 80% of a hard regulatory threshold or involves a watch-list name with active MNPI concerns