Trade safely with adequate warning around derivative position limits.
Some of you reading the title of this blog may recall Keny Loggins’ track “Danger Zone” from the 80s classic Top Gun sparking images of Tom Cruise taking down numerous enemy MiG fighter jets in his F14-A Tomcat. Perilous situations like these are commonplace in the world of position limits compliance and we have discussed the difficulty of monitoring these limits at length previously. Some recent examples include Diminishing Limit Contracts, HKEX delta adjustments and large open position reporting.
However, in addition to actually monitoring the limits themselves, we frequently hear from clients and prospects that they have struggled to implement processes that provide adequate warning when their positions come to approach the “Danger Zone” - relevant position limits, accountability levels and reporting levels. Given the size of penalties for non-compliance, this is far from an ideal setup for a good night’s sleep!
At FundApps, we like our clients to focus on generating alpha instead of worrying about whether or not they are compliant. Accordingly, we wanted to come up with a solution to this problem. With the breadth of our users spanning institutions from nimble hedge funds to investment banks, sovereign wealth funds and some of the largest asset managers in the world, we know that no two of our clients are exactly alike. To that end, we set about creating a solution that could adequately warn all of our clients of their positions trading close to limits regardless of trading style.
To solve this problem we built Custom Warnings into our Position Limits service and we rolled it out to our Position Limits clients at no extra cost. Prior to this development, users of our Position Limits service were destined to obey the standard 10% warning level across all position limits rules. To be clear, this meant that warnings would be triggered when a holding in a particular contract was within 10% of the given limit. For example, if a contract has a limit at 1000 our service would start triggering warnings when a client’s holding in the contract exceeded 900 (1000 - (1000 * 0.1) = 900).
With the advent of Custom Warnings, our clients can now amend this standard 10% level to make it more or less conservative depending on their risk appetite.
Screenshot of Custom Warnings in our Position Limits service