NICE Actimize clients can join Jon and other subject matter experts at ENGAGE Client Forum on October 25-26 in Brooklyn, NY. Topics of interest include “Communications Surveillance and Monitoring: What’s Next,” presented by Jon Simone and “Trade Reconstruction and the Intent to Manipulate: Putting the Pieces Together,” presented by Aite Group analyst Danielle Tierney. For more information, visit www.niceactimize.com/engage.
The topic of “trade reconstruction” — defined as combining all pre and post trade communications along with relevant trading activity -- has become a large focus within regulatory requirements such as MAR, MiFIDII and others* these days. As a result, financial institutions are starting to feel even greater pressure to comply with new rules as regulators put on the heat, make increasingly stringent requests for data, and more closely examining how a firm will handle the trade reconstruction process. So perhaps not surprisingly, within the last month alone, multiple firms have approached us asking how their peers are complying when these specific requests. Maybe what is even more surprising, however, is that the majority of responses reveal that the process is still largely manual at many operations. When I ask why it’s still that way, it uncovers some interesting truths.
The first and biggest issue is a rather simple one that you might not expect. Financial institutions are still struggling with answering the basic data questions: what data, exactly, must be included in a properly executed trade reconstruction. Do I need trade data, market data, communications data, settlement data, and hedging data? That is just to name a few kinds of “data” in the funnel. Until a firm actually submits their first requested construction, they really aren’t too certain what the expectation of the regulator will be, other than they need to get it to them quickly. That poses the second issue. The current process being used to reconstruct is manual in nature and, therefore, it may take days and even weeks to bring all the right information together versus the “minutes and hours” it could take if properly automated.
Firms historically store the needed data in multiple vaults with very different data structures. Just finding the necessary data is a major challenge and that’s just the first step. Tasking a team of individuals to do this removes them from the everyday responsibilities, which in turn, creates additional risk because they may have missed something new that has been flagged while they are putting all their efforts into the reconstruction. This is something I believe firms are overlooking and have not taken into account in the trade reconstruction process.
An additional risk is aligned to the fact that so much time and concentration is spent looking for the data. Often by the time they find what they need, the deadline to submit has grown close. At that point, many firms wind up handing over their data “blind” without actually spending the required time to review and fully understand what they are giving over.
This manual process is so ineffective and inefficient that it is obvious that firms need to move to using technology to get them to a place where it gives a single person, with full access to all data in a single application, the ability to properly identify, gather, and analyze to comply with the request and not open up the firms to additional risk. There are reasons that trade reconstruction guidelines exist – why risk missing critical details when automation and improved surveillance technologies make the process so much more effective.
*Dodd Frank Act Section 731 and 764, Commodities Exchange act 4s (g) (4), Securities Exchange Act, Section 15F (g) (1), CFTC Rule 1.31 and 1.35(a).