Overcoming the Challenges of Market Surveillance

On June 13, RIMES convened an expert panel of speakers at its New York Summit to discuss regulatory compliance, market surveillance, and associated RegTech services. During the panel debates, as well as in a keynote delivered by Bruno Piers de Raveschoot, COO of RIMES’ Regulatory Division, some of the key challenges of effective market surveillance were identified. As firms go about modernizing their surveillance systems to meet increasing regulatory obligations, overcoming these challenges will be critical.

Chief amongst these challenges, is the sheer complexity of detecting instances of market abuse or insider trading. At present, regulatory oversight will usually be triggered by an abnormal market movement, or an abnormal price movement. The regulator will then investigate the suspicious activity by reviewing which firms and traders were trading the instrument in question a few days prior to the movement.

With firms increasingly obliged to detect market abuse proactively and report it to the regulators, they must take on this detection role. When it comes to the equities market, this is a relatively simple task. Price movement can be detected by profiling the volatility of stock and netting it against the market movement. If any movement away from the profile is detected, that constitutes a movement in price.

However, when it comes to the corporate bond market, such monitoring becomes exponentially more complex. This is because the lack of volatility in the bond market makes profiling impossible. In this environment, firms have no way of knowing which price thresholds are valid.

To solve this challenge, data is critical. By using a bond’s own parameters, firms will be able to understand which thresholds are acceptable. To do this, firms need to factor-in data such as the duration of the bond, its outstanding value and its spread over time. Without access to these attributes, firms will struggle to detect market abuse. Data quality is therefore essential to effective market surveillance.

Over the course of the RIMES Summit, four other key challenges emerged:

  • Ensuring surveillance models can be fine-tuned to each unique asset class for accurate detection
  • Reducing instances of false positives to make detection more effective and efficient
  • Conducting surveillance across multiple levels
  • Creating a holistic solution that encompasses all surveillance and compliance requirements

With the regulatory focus now covering a greater array of financial instruments and trading venues, firms need to put in place robust surveillance technologies and processes to identify and control market manipulation and insider trading. At a minimum, these approaches must be capable of identifying, monitoring, mapping and reporting on a broad range of behaviors.

As firms look to meet these challenges, RegTech services, such as those delivered by RIMES, will prove critical. RegTech provides firms with a quick and easy way to upgrade their surveillance capabilities without accruing the high costs associated with in-house projects. The best RegTech solutions place data quality at their heart and can be finely tuned to meet the unique business requirements of firms.

To receive more information about RegFocus® Market Surveillance, a single solution to the regulatory challenges brought about by current market manipulation and insider trading legislation and designed for both the sell and buy-side, please contact us.

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