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RIMES Compliance Panel Talks Market Surveillance

On June 13, RIMES convened an expert panel of speakers in New York to discuss topics around market surveillance compliance obligations and RegTech solutions. The panel comprised Antonia Savaria, Attorney & Founder of Atlantia Advisers; Jon Hantler, Senior Compliance Officer at OZ Management; John Spinola the North American SME for Compliance and Surveillance at RIMES; and Bruno Piers de Raveschoot, COO of RIMES’ Regulatory Division. What follows is a summary of the key points raized during the discussion.

The first topic of conversation concerned the functionality of RegTech and how useful it can be in reducing instances of false positives in market and trade surveillance. The panelists agreed that to be successful in reducing false positives, compliance teams need access to a system that ingests as much clean and relevant internal and external/market data as possible. This data must then be filtered through highly-tunable analytics capabilities.

Surveillance analytics capabilities must be based on policies and procedures that are tailored exactly to each individual firm’s investment strategies and asset classes and monitored by compliance professionals with the right mix of industry, technology and regulatory expertise. The analytics platform must also be ‘smart’ enough to take account of the natural peaks in activity experienced on the buy-side; such as when a new client is onboarded, or a portfolio is rebalanced.

On this topic, the panel raised the point that false positives are not always undesirable; and that ‘false negatives’ are a much more frightening proposition for compliance officers. The ideal solution is not necessarily the complete elimination of false positives, but the data-driven prioritization of alerts according to the likelihood of actual insider trading.

Next, the panellists discussed the role of data management in maintaining an effective surveillance ecosystem. In lieu of a full set of data, or the ability to continually enhance the information being fed into the surveillance system, firms risk missing cases of market abuse. Data needs to be clean and available in sufficient volume to create meaningful insights. In the respect of the latter, external data is key as it helps paint a broader picture of what was happening before, after and during a suspicious trade.

When looking at the two differing analytical strategies that can be used to identify market abuse – news-based analysis and behavioral analysis – panellists agreed that the latter approach appears to be the most promising. News-based approaches are not very tuneable and are liable to higher instances of false positives. Additionally, no one has yet been able to demonstrate exactly how news events affect markets. Behavioral approaches, on the other hand, provide a finer level of understanding and allow firms to identify suspicious activities in areas such as position adjustments, which news-based analysis would miss.

The panellists then discussed the surveillance of multi-asset classes. The key point here was that the market structure is behind where it needs to be. At present, it can be difficult to perform surveillance on anything other than exchange-traded equities/derivatives because data for other asset classes is insufficient. Until there are enough data inputs for useful analysis, multi-asset surveillance will be a challenge. This is exacerbated by the fact that many surveillance technologies are revamped versions of those built for surveilling equities trades. These technologies are therefore not fit-for-purpose. What is required are different analytical approaches for different asset classes.

This part of the discussion was concluded by an examination of how firms can best monitor trading and investment discussions with expert networks and in management meetings and/or calls. As discussions with expert networks become more prevalent, firms will need to ensure they collect good data on these encounters. Moving forward, the ideal would be to have a high level of automation to store key data points from expert network and management meetings; including how often meetings occurred and which companies/sectors were discussed. This data could then be usefully overlaid with news-based analytics to identify potentially suspicious activities. RegTech will play an important role here in marrying all relevant datasets and making it available for rapid and meaningful analysis.

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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