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Best Practices for a CTA’s back office (part 2)

03/02/2016

Permalink 01:49:00 pm, by Dana Comolli Email , 988 words   English (US)
Categories: Accounting, Backoffice, Compliance

Best Practices for a CTA's back office - part 2

Trading can be hazardous, but not being on top of your business and accounting can be even worse. As we noted in the last blog good performance is great, but good performance with a stable, efficient and reliable back office is what investors want. What exactly does that mean to the CTA?

Mike Dever, CEO and Director of Research of Brandywine Asset Management, has been a CTA since the 1980s and has gone through many allocator reviews – and received many investments. He says typically the allocator will send an itinerary of what they want to review and if they don’t, Mike will ask for one. Also, more common today is two groups come from the allocator: one that comes to discuss philosophy, research and strategies with the manager/traders, and the second is operational, charged with determining how the CTA executes trades, what’s its relationship to its brokers, and what is the underlying technology; basically the back office details.

To prepare, Dever and his team put together all the requested information, data print outs and examples, in one large notebook that they’ll review with the allocator when they visit. They also will go through the actual back office process, for example, providing a demo account, allowing the allocator to sit in and experience the process step-by-step.  He says his team does practice drills before an allocator review to make sure the meeting runs smoothly.

So let’s discuss these best practices and what they mean to the CTA:

1) What is your general setup: legal structure, ownership breakdown and financial strength? But beyond that they want to know about key personnel and with that, segregation of duties (ie. compliance can’t be sales, operations shouldn’t be accounting). Some back office accounting software, like TheBooks, have the ability to limit access to certain parts of the business via security codes, and can be defined by personnel or job function.

Also scrutinized will be cross training of personnel; if someone is sick or an emergency arises, can others step in and provide the same quality of service? Do you have a process set up for new hires? And what happens when you travel? What is your back up, both for that day as well as the bigger picture in transacting the business?

2) Who are your key service providers? These include back office accounting software, general accountants, FCMs, technology providers, administrators and even temp agencies.  You’ll need to outline how these firms are chosen, what roles they fulfill and on what basis are they are dismissed. Here allocators look for depth: they want to make sure the CTA is buying the provider not just for pricing, but because it actually does what is needed. Also, how do you monitor vendors? For example, do you or someone else at the firm review end-of-day results, and if not, they should be. Allocators will want to see a checklist.

Annette Cazenave, principal of A. Cazenave LLC, says: “Let’s face it, your two big areas of liability are striking NAV and how you sell [your products], so you need to review everything before you push it out the door.” Also, if you lose a key person, can your service providers step in to fulfill that need until you’ve gotten the next person up to speed? Do you have that action plan set up?

3) Operational processes and procedures for trading controls, compliance, valuation and treasury. This includes being able to show reproducibility of trades, daily trade files, valuation checks and transparency. It also means showing how you move the money around as well as how you handle new allocations.

Dever says they typically need to document a trade: how was it generated, how did it get sized, how was it allocated per client and why, who was involved in trade? Again, having reliable back office software that can document trades is key. Todd Fulton, senior VP, capital introduction, for R.J. O’Brien, advocates all traders have back office software, noting, “Trade checking is a major part of what I like about TheBooks.” Alan Zenk, who runs CTA Services, a service bureau for smaller CTAs, says that the NFA recently has focused on trade allocations and making sure they are handled similarly across all accounts. With various sized managed accounts, this could be a nightmare for CTAs and a major trip up in a due diligence review.

4) IT infrastructure, cyber security and disaster recovery: You’ll need to outline the IT infrastructure of the company, explain your account security and what happens if an event, man-made or not, brings the system down. This doesn’t mean necessarily a 9/11, but could mean the Internet going down, an electricity grid failure, or a snowstorm (or other natural disaster). For example, if a huge storm is coming, are you getting hotel rooms for key personnel? The answer may be yes, but what’s your game plan? Remember too, third party vendors are helpful in this situation as they can serve as back ups and remote offices: know ahead of time what you can rely on and be able to explain it. This certainly is a mark of a prepared trader who is ready to take on large allocations.

It’s a formidable task to be a successful CTA, but actually designing a winning model and/or strategy is only one part of the success quotient. Making sure your back office is well structured is key, and though standards may differ allocator to allocator, the points highlighted here are a minimum.  Think of it like this: Trading is driving the racecar, but it’s the pit crew that wins you the race.


Dana M. Comolli is president of DMAXX (dmaxx.com), a back office software design firm for alternative investment managers. TheBooks software is designed for the trader, and is built to do price, position and order management, reconciliation, trade accounting, performance reporting, risk and data management and act as a gateway to a wide variety of execution platforms. You can reach Dana at: dana@dmaxx.com

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