Over the past few years there has been an increased regulatory focus on trade and communications surveillance to identify market abuse, suspicious activity and financial crime. 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, have pushed the issue high on the agenda, illustrating that ensuring compliance is no easy task.
In this article, Helen Bevis explores key challenges financial firms have encountered so far, and explains how RegTech solutions are helping firms meet their obligations, and providing them with insights to future-proof their businesses.
What regulatory changes have taken place in recent years that have impacted how firms approach trade and market surveillance?
The emergence of regulations such as the Markets in Financial Instruments Directive II (MiFID II) and the Market Abuse Regulation (MAR) has required financial services firms to comply with comprehensive demands aimed at curtailing market abuse and regulating trade activity.
Introduced in 2016, MAR significantly expanded on existing regulation, 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 financial interactions, ranging from trade and internal communications, to 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 of this is an enormous demand for comprehensive data collection and analysis to intelligently sort through varying trading activities and identify and manage risk where necessary.
What are the main challenges to firms in complying with these regulations?
There are multiple challenges facing financial firms in keeping up with these obligations.
To date, many of the existing systems and practises in place have been ill-equipped to manage such intricate and complex challenges, leaving firms at risk of receiving hefty fines.
Data management is a key issue. Many of the older, legacy systems in place are unable to integrate the masses of data across all the different sources, such as emails, instant messaging and phone-calls. This makes it difficult to detect events that are often composed of multiple activities, increasing the possibility of missing key signs of market abuse.
It’s also extremely resource and cost heavy, forcing a large re-allocation of resource and budgets. In particular, impacting the smaller firms. Smaller wealth and asset managers that previously relied on their sell-side counterparts for the majority of regulatory matters 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, tedious and expensive task.
How are RegTech platforms helping firms overcome these challenges?
Increasingly integrated solutions that have emerged 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 data onto one platform that can be viewed on a single interface, streamlining and simplifying the process.
While storing the data in one place is the first step companies should take, compliance officers are constantly looking for evidence of tools that can spot and highlight suspicious activity, often before it has even taken place. Platforms such as SteelEye excel in this regard, by offering smarter solutions through advanced data relationships, AI and behavioural analytics, these systems 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.
New RegTech solutions have also made it more affordable for smaller institutions, helping to rid them of the burden and liability of manual surveillance and reporting. By providing a more efficient and smarter system, smaller firms can manage their regulatory obligations, bringing their surveillance data together for analysis in a much more affordable and accessible way.
Beyond compliance, what sort of benefits and opportunities can be sought from investing in these technologies and platforms?
Approaching trade and communications surveillance as more than just a compliance exercise can present firms with a number of benefits.
For example, SteelEye’s solution allows 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.
The increased focus on trade surveillance can, and should, be seen as a strategic and insightful tool for financial services companies. Backed up by recent research from Ernst & Young, already one third of firms are developing their surveillance capabilities for internal and operational reasons beyond simply compliance.
Client Relationship Director
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