• Helen Bevis, Director, Financial Markets Compliance at SteelEye


• 10.04.2019 01:15 pm
regulations

There is growing pressure across the financial services industry for firms to detect market abuse and ensure their companies protection against manipulative market risk. With the emergence of regulations such as the Markets in Financial Instruments Directive II (MiFID II) and the Market Abuse Regulation (MAR), financial services firms are now required to comply with comprehensive demands aimed at curtailing market abuse and regulating trade activity.

But as it stands, many of these institutions are held back by out-dated systems in their attempts to monitor, record and report significant volumes of trading and communication data. With recent cases such as the Libor and Foreign Exchange (FX) trading scandal, the manipulation of ISDAFIX in 2019, as well recent controversy of rate-rigging at Barclays illustrating the increasing willingness of  regulators to implement fines, it is more crucial now than ever that financial services firms are equipped to meet these regulatory challenges.

Thankfully, new technologies have emerged in recent years that provide considerable benefits for financial services firms to help them address the regulatory challenges of trade and communications surveillance. Such solutions not only simplify and increase the efficiency of compliance processes, but they also extend beyond regulation, giving firms a holistic view of their trading data and providing insights that can help transform their own operations.

Complex new challenges

Introduced in 2016, MAR upped the ante [on what], presenting a set of new challenges for financial firms. Under these new regulations, financial services firms are required to consolidate all of their trade and communications data linked to any financial interactions, ranging from trade and internal communications, orders, trade reports, employee behaviour and CRM data. This data spans a breadth of financial instruments across venues, asset classes and regions. Adding further complexity, the regulation also demands that firms monitor and report not only successful instances of market abuse, but all attempted cases.

The result is an overwhelming demand for comprehensive data collection and integration methods, as well as the need for complex monitoring and analysis capabilities suited to intelligently sort sift the varying trading activities, and identify and manage risk where necessary.

To date, existing systems and practises have been ill-equipped to manage these new and intricate challenges, but as new methods are evolving, this is beginning to change. So, how has technology enabled a more streamlined compliance process that has met these challenges?

1. Better data

Many of the older, legacy systems are unable to integrate the masses of data across all the different sources, such as emails, instant messaging and phone-calls. This has negatively affected a firm’s ability to detect events that are often composed of multiple activities – increasing the possibility of missing key signs of market abuse and exposing companies to liability. It’s hardly surprising therefore that in a recent Chartis Survey, data quality and integration were cited as the second biggest challenges to financial firms in their surveillance obligations.

New technologies have simplified this, however. Increasingly holistic solutions enable companies to capture data from disparate systems, including trading and market data and all data relating to electronic and voice communications. Once collected, these solutions can consolidate and format onto one platform that can be viewed on a single interface, streamlining and simplifying the process.

2. Intelligent analysis

Storing the data in one place is the first step companies should take. Compliance officers are looking for evidence of tools that can spot and highlight suspicious activity, often before it has even taken place. Giving firms the right analytics tools to effectively use analyse vast reams of data is therefore essential.

Machine learning and Artificial Intelligence (AI) have come to the forefront in this regard. These capabilities, through advanced data relationships and behavioural analytics, allow firms to identify patterns in their data. This enables them to understand normal activity, and as such, allows them to identify deviations in behaviours. As a result, firms are able to more easily identify risk and forecast areas of concern that can be more readily analysed, creating a solid basis for an investigation.

3. Reducing the regulatory burden

Complying with such a comprehensive programme is challenging for all businesses, forcing a large re-allocation of resource and budgets.  But it is the smaller wealth and asset managers that relied on their sell-side counterparts for the majority of regulatory matters that are feeling the most impact of the new regulations. These firms have fewer resources to dedicate to complex compliance requirements, and lack the necessary controls, particularly in regard to insider information and post-trade surveillance, making compliance a complex and tedious task.

But while this may sound complex and expensive, advances in technology has made it affordable for smaller institutions, helping to rid them of the burden and liability of manual surveillance and reporting. By providing a more efficient, smarter system, smaller firms can manage their regulatory obligations, bring their surveillance data together for analysis in a much more affordable and accessible way.

4. Driving further insights

Moving beyond the pure regulation requirement, the increased focus on trade surveillance can, and should, be seen as a strategic and insightful tool for financial services companies. Indeed, recent research by EY stated that already one third of firms are developing their surveillance capabilities for internal and operational reasons beyond simple compliance.

Emerging trade surveillance solutions allow companies to consolidate and format all of their data that can be viewed on one single interface, giving firms a forensic view of how their business operates day to day. This can forecast and predict patterns of behaviour, establish what does and does not work, and ultimately help firms achieve greater efficiency to improve and optimise their profitability and performance, giving them a competitive edge.

Conclusion

Meeting the challenges of effective and comprehensive trade and communications surveillance is clearly no easy task. But if organisations can begin to realise the benefits that a robust data capture system can provide, they will begin to appreciate the long-term opportunities that go beyond compliance, helping transform their operations.