It is no secret that regulatory authorities around the world have tightened their hold around financial institutions’ trade surveillance activities, calling for greater transparency and governance across the entire trading process. No matter the country of origin, one thing remains universal. Regulators want that increased transparency coupled with effective processes that establish a level playing field for market participants as they strive to mitigate risk. A critical change is that financial institutions are now being held accountable for their employee’s misconduct – for traders’ rogue trading activities for example – and punitive measures have been established to ensure compliance from both a company and individual actor level.
Certainly this climate has resulted in a new urgency for financial institutions to radically transform current surveillance practices, to ensure that their operations are keeping up with the speed of the 21st century trading environment and that the non-compliant are quickly identified and halted.
A number of other changes have transpired. Conventional trade surveillance, for example is focused more on post-trade analysis. However, with trading platforms evolving digitally to allow for high frequency trading and real-time trade execution, surveillance must keep adapting to all these changes to stay ahead of this transformation.
But what do the chief compliance and risk officers do in all of this complex environment of change? In order to meet these new challenges, they need to continually review their current risk compliance frameworks. As they do this, they should keep the following three core considerations in mind:
- Adopt real-time system controls. When building their compliance framework, risk and compliance officers should adopt robust models that are able to adapt quickly to meet both global and local changes in regulatory standards. An increase in transactions across geographies, development of new asset classes, and changing local regulations across the globe result in firms needing to balance business objectives with regulatory compliance goals.
- Talk to the Board of Directors. As compliance and risk mitigation programs become a more urgent agenda item requiring attention of the Board of Directors, it is important that heads of compliance are empowered with sufficient resources to ensure both corporate compliance and to instill a culture of compliance. These resources should include a direct line of communications to the Board of Directors, unfiltered access to specific information, and unfettered authority to carry out their work. Of course, with that is the imperative for compliance departments to work closely with their risk departments to effectively mitigate risk from a compliance perspective for all global initiatives.
- Implement all-inclusive holistic surveillance. The growing scale of trade volume, combined with the increasing complexity of global regulations, has created an escalating need for surveillance technology across both trade and communications data. A holistic and all-inclusive surveillance framework could potentially help financial institutions save billions of dollars in fines and reputational loss. In the case of rogue trading, trade and communication surveillance does more than provide a timely intervention – it also acts as a strong deterrent compared to a post-trade investigation since a trader knows they are being monitored.
Let’s look at a strong example of how this approach really works to save time – and potentially reputation. One of Europe’s leading financial institutions has started utilizing new communications surveillance technologies. Using an innovative benchmark monitoring solution, the bank was able to discover connected conversations in about 30 minutes and complete the necessary evaluation in three days; before, using other technologies and manual methods, this same process had taken more than four months and 480 man hours to achieve. According to the institution, this resulted in a 160-times faster investigation process, along with significantly reduced costs.
Firms need advanced surveillance technology such as this if they ever expect to manage the sheer scale, speed, lines of communication, and trade information present today. A single surveillance platform can help firms achieve a holistic view of unwanted behavior with a single investment and lower the total-cost-of-ownership.
While regulatory requirements are still morphing practically every day, these changes may pose additional challenges to market players in the future. But regardless, the objective is clear: to protect the credibility and reputation of our global financial markets and prevent unlawful market abuse from damaging the confidence of market participants.