Regulatory Roundup: Recent FCA, CFTC, FINRA & DoJ Fines, Cost of Compliance

April 2018

FCA Fines and Bans Former Trader, Guillaume Adolph

What’s New: Recent headlines have been dominated by trader Guillaume Adolph. Nicknamed "Gollum" after the greedy character in The Lord of the Rings, the former derivatives trader has been banned from trading for his role in the Libor scandal. The Financial Conduct Authority determined that Adolph is "not a fit and proper person to perform any regulated financial activity." Among other actions, Adolph sent at least 20 communications with the intent to influence the people making the bank’s Swiss franc variant of Libor submissions in order to benefit his own trading positions between 2008 and 2010. This is in addition to over $9 billion in fines levied on banks for Libor misconduct.

How NICE Actimize can Help: Communication surveillance remains a challenge for many firms, making situations like that created by "Gollum" all too common. Many organizations surveil ecomms with antiquated non-compliance focused solutions. Firms record voice communications, but are only surveilling a small percentage of the communications using random sampling as their primary control. Firms are also challenged because different communication channels are archived in separate silos with no integration and oftentimes belong to different stakeholders in the organization.

NICE Actimze’s Communication Surveillance solution breaks down the silos and gives firms the ability to analyze 100% of the communications over any communication channel. Leveraging the banks existing policies it also prioritizes potential risky communications so firms can focus on the ’right risk.’

NICE Actimize’s Trade Reconstruction solution allows firms to conduct a full trade reconstruction, combining all trade activity with associated communications and a timeline to gain complete insight into the activity. All of this can be done in minutes from a single search, allowing firms to uncover unknown risk and provide the opportunity to correct misconduct like this before the regulators come knocking.

CFTC Fines

What’s New: The CFTC issued fines totaling $46.5 million to three firms for spoofing the US Precious Metals Futures market on COMEX. Two major banks were fined $1.5 million for abuse from July 2011 to August 2014, and $15 million for abuse from January 2008 through December 2013. Another global bank received a $30 million penalty for abuse that occurred from February 2008 to December 2013.

At one bank, the CFTC identified traders who acted in collusion, while traders at two other banks acted on their own.

How NICE Actimize can Help: NICE Actimize’s Markets Surveillance would have empowered the three firms to be able to detect this market abuse and saved them millions in fines. Markets Surveillance is designed to protect global financial institutions from spoofing and other types of market abuse. The identification of collusion at one of the financial institutions was most likely found in archived communications between the two traders after a significant amount of manual and tedious effort to review many conversations. NICE Actimize’s Communication Surveillance solution could have detected the potential high risk communications automatically and assigned a risk score, most likely bringing it to the attention of the compliance team immediately following the conversation. These forms of proactive detection and risk management mean that the firms would have discovered the market abuse long before the CFTC did and would have significantly reduced the financial impact incurred in fines to the organization.

FINRA Fines Investment Firm $2 Million for Failing to Reasonably Supervise Email Communications

What’s New: The Financial Industry Regulatory Authority (FINRA) announced that it has fined a major financial services firm $2 million for failing to maintain a reasonably designed supervisory system and procedures for reviewing email communications. Following a nine-year review period, FINRA concluded that the firm’s email review system was flawed in significant respects, allowing millions of emails to evade meaningful review. This created the unreasonable risk that misconduct by firm personnel could go undetected. To monitor email communications, the firm in question used combinations of words and phrases – otherwise known as a text-based ’lexicon’ – to flag emails for review. But it was determined this approach was not reasonably designed to detect certain potential misconduct. While it did reduce the number of ’false positives’ (e.g. the quantity of irrelevant emails that needed to be reviewed), it did little to actually ensure that problematic email communications involving potential misconduct were brought to light.

How NICE Actimize can Help: NICE Actimize’s Communication Surveillance solution goes far beyond the text-based ’lexicon’ approach employed by this firm. The solution cleanses, standardizes, and enriches the data before applying unique analytic models. It supports dozens of languages, and conducts continuous monitoring and identification of ecomms to proactively detect issues. Communication Surveillance is designed as a compliance solution with regulation-based rules and models (with priority scoring to highlight critical conversations). Any firm using this solution should never be fined for their supervisory solution. Regulators understand and appreciate that Communication Surveillance consistently employs the latest technology and innovation to manage risk.

Department of Justice Fine (DoJ)

What’s New: The Department of Justice (DoJ) recently issued a $100 million fine on a bank for abusive practices within the bank’s FX division. Two institutional clients who had signed NDAs were about to transact large block orders in the FX market via the bank.

Identified breaches included Front Running, Ramping the Market, Manipulating the FX and the misuse of confidential information.

How NICE Actimize can Help: NICE Actimize’s Markets Surveillance models are designed to detect market abuse including Control Room, Front Running, Marking the Fix and Price Ramping. Markets Surveillance has solutions for both buy side and sell side and across 6 asset classes. It is a complete solution for detecting market abuse and protecting firms from fines. A $100 million fine is extremely large (even for a global bank) and the potential damage to a firm’s reputation can have a lasting effect on a firm’s growth.

Cost of Compliance

What’s New: JWG, a think tank focused on regulations, has released a white paper highlighting the scale and cost of recent regulations.

To digest the complete text on MiFID II’s rules, you’d have to read 30,000+ pages and 1.7 million paragraphs. The white paper also points out that it has cost the industry approximately €2.5 billion to implement MiFID II in the last few years. By comparison, Dodd-Frank’s rules consisted of 22,000 pages and the cost to the industry has been $36 billion since 2010.

Separate research published by the TRADE estimates that banks spent approximately $100 billion on regulatory compliance in 2016. Global advisory firm Duff and Phelps estimates that compliance costs are typically 4% of revenues, and will rise to 10% by 2021.

The study reinforces what has been existing in the marketplace for nearly a decade. Compliance costs continue to rise as regulations continue to evolve, and this puts a significant burden on firms to control costs while also limiting their ability to invest in areas other than risk management. The manual efforts used by many firms to manage risk are increasingly proving ineffective against the volume and variety of activity and communications involved in trades. Firms need to equip their compliance personnel with the right tools and resources so they can focus on the ’right risk’ to protect themselves from fines and reputational damage.

How NICE Actimize can Help: NICE Actimize’s solutions offer the most advanced tools and analytics and the latest technology to manage risk effectively. Regulations continue to evolve and are consistently becoming more stringent and more complex to comply with. NICE Actimize’s solutions enables firms to meet the regulatory requirements of today and tomorrow.