The EU Benchmarks Regulation (BMR) taking effect January 1, 2018 is creating concerns about the amount of work necessary for compliance and the costs for that work, according to compliance officers for investment and hedge fund managers who spoke about the use of technology amid regulatory changes, at the Buy Side Technology Summit in New York on October 5.
The executives, joined by Bruno Piers de Raveshoot, COO of RIMES’ Regulatory Division, cited information feed management, automation, profiling of traders, behavioral analytics and transparency with regulators as functions and actions that are all useful in response to new rules such as BMR.
Aside from monitoring benchmark administrators’ actions (covered in a previous RIMES Insight piece), asset managers using benchmarks must also be concerned about how compliance is generating more operational work and higher operational costs.
“Generally, anyone with experience implementing new systems knows it’s very burdensome. It requires a lot of manpower in the beginning,” said Adam Reback, chief compliance officer at J. Goldman & Co. LP. “About trade surveillance and anything that generates reporting that you will have to address, the fear is always that it will generate a lot of noise. You’re used to your manual systems and know how to identify whether the system can do that effectively without creating more work for your human resources.”
The EU has included in the language of its BMR that compliance officers can be held personally liable for violating regulations, including in benchmarking efforts, noted Joseph Lodato, chief compliance officer at Guggenheim Partners. “If you don’t have the technology behind you, you’re almost flying blind,” he said.
Also, compliance costs are rising, with asset managers realizing vendor systems that have been implemented need to be customized, according to Reback. Regulators expect firms to be able to do everything they themselves can do, such as using DERA systems to analyse trading patterns and statistics, for compliance with US SEC Division of Economic and Risk Analysis reporting. DERA systems draw on that analysis to find and display exceptions. Firms must now be able to produce much longer histories of trade data, increased from three months in practice, if not according to the rules, to three years at present – without permitting any negotiation of a lesser time period of data, added Reback.
Still, there are some simple do’s and don’ts for complying with BMR that won’t bust your firm’s budget. These include being sure to access all available information feeds, automating functions that require data obtained from trade surveillance, using behavioral analytics and being transparent with regulators. Along with these actions, firms should avoid profiling traders, which can yield “false positives” that get picked up as correct data, observed Bruno Piers de Raveshoot of RIMES.
Information relevant for BMR compliance can be found from the US Securities and Exchange Commission, including risk alerts and enforcement actions, noted Reback. Law firms tend to also distribute useful compliance information for free, according to Craig Peretz, chief compliance, operating and financial officer of Sierra Global Management. “A lot of the rules and regulations are not just related to the US. If your firm trades globally, the rest of the world is piling on with new regulations,” he said. In addition, IBM is working to apply its Watson artificial intelligence to collecting and evaluating relevant regulatory information, Lodato noted.
Email archiving, media monitoring and individual trading are smaller and simpler functions that are ripe for automation, Reback elaborated, while larger functions will need supporting data. The flip side of speeding up processing is being able to catch suspect activity, which behavioral analytics makes possible, as Lodato explained. “If someone is spoofing the market, I want to know as quickly as possible,” he said. “In other systems, you really want to look at the pattern and see what’s happening inside and out – for instance, in cyber security.”
Regardless of how a firm streamlines operations to better handle benchmark data or catch problems that could relate to benchmarks, if there is a problem, said Reback, “You’re so much better off telling the SEC when they come in, that you had an issue and here’s how you handled it, instead of them finding it. That’s huge as part of this process.”
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