Diligence for a Systematic Technology Licensing Transaction

Judging licensed trading technology on the provider's own performance claims is like accepting a vendor's description of its security without an audit. A provider's marketing material is not evidence that a board or regulator will accept as meeting its oversight duties.

The asset manager's evaluation had advanced on exactly that basis. It had little independent verification of the architecture, the risk controls or the trade-level audit trail. The licensing structure on the table also had integration and control consequences the internal team had not yet worked through.

We ran structured diligence on three things: how diverse the architecture was, whether every trade could be audited, and how the risk controls were designed. Each document and counterparty detail was exchanged under an executed NCNDA, which protected the provider's technology as well as the manager's process. We then compared the licensing structures.

• →The manager adopted a structure that runs on its own infrastructure and meets its control requirements. Each trade has been auditable since deployment began.
• →Both parties' confidential material remained under the NCNDA for the whole negotiation.
• →Before go-live, the board and risk committee received an oversight framework designed to meet regulatory expectations.

We verified instead of accepting. Architecture, controls and audit trail were each examined independently, so the recommendation rested on what the technology demonstrably did.

Choosing the structure after the diligence, and against the manager's own systems, meant the commercial terms followed from fit and not the other way round.