On April 22, RIMES and SOTERIA co-hosted a virtual panel discussion on the topic of trade and communications surveillance to mark the first integration between RIMES RegFocus Market Surveillance and SOTERIA. The discussion was moderated by Carina Evison, Chief Marketing Officer at SOTERIA and included contributions from Steven Nash, founder of 3CR Consulting; Paul Hodge, co-founder of 1LoD; Robert Houghton, creator of SOTERIA; Scott Burke, Regulatory Product Manager at RIMES, and; John Davison, Managing Director of Dentons Risk Consulting LLP. The following is a summary of the main points discussed.
The challenges and benefits of integrated trade and communications surveillance
Financial sector firms have in the past struggled to combine trade and communications surveillance. In part, this is because the two types of surveillance rely on different types of data: highly structured trade and order data on the one hand, and unstructured voice and ecomms data on the other.
There is therefore an imperative for firms to rationalize their systems and processes by bringing disparate control functions together. And now is the time to start: once the COVID-19 restrictions are removed, businesses will return to full throttle and it will be harder to find the time needed to make changes.
Truly integrated trade and communications surveillance is completely new, and RIMES’ and SOTERIA’s approach is the first successful integrated solution to be available in the market. The expected benefits include simplifying compliance processes, helping firms more easily identify potentially suspicious activities, and making trade reconstruction more efficient.
Drivers to integrated surveillance
Several factors have stifled the uptake of integrated surveillance at banks. First, technology projects at these institutions are complex. Large banks can use hundreds of trading systems and multiple communications systems. Second, technology projects typically involve a large number of stakeholders and budget structures that lock teams into multi-year projects. Finally, as mentioned above, technology adoption has traditionally been siloed.
However, regulatory changes mean that banks must now report more forensically, a requirement that’s causing them to revisit their surveillance systems. Whereas three years ago few, if any, banks were considering integrated surveillance, now most feel it is a requirement for effective risk management.
Tier two banks and buy-side firms are at a different stage in the journey. Many will have only trade or only communications surveillance in place, and acknowledge the need to ramp up their capabilities. These organizations have the opportunity to leapfrog straight to integrated surveillance to ensure their systems are future proof.
Another barrier to integrated surveillance has been the large amounts of manual work required to tie communications to trade exceptions. Linking communications to suspicious activity is more essential than ever as surveillance moves from traditional rules-based approaches to the analysis of behavioral patterns. This barrier has now been addressed through system automation. Reviewers can spend their time focusing on analysis, with the surveillance platform taking care of data preparation. As more data sources come into the mix, automation will become increasingly critical to effective monitoring.
Enhancing controls and processes
Looking at the processes around surveillance, it should have two key interactions: 1) as part of the overall control environment, and 2) as part of a firm’s governance architecture. The best approaches today see surveillance as interlinked with all elements in the control environment. They also apply processes to ensure that surveillance doesn’t become a formulaic process and that the right people in management, compliance and at the trade desks have the information they need.
Good governance for surveillance monitoring includes capturing how decisions were made and recording who made them. Compliance teams should also communicate to all stakeholders what their responsibilities are and clearly set out any limitations in the compliance framework. Doing so reduces the risk that something is missed.
This approach ties in with the expectations of regulators. Surveillance controls are expected to be in place across the first, second and third lines of the business. While the first line has an important role to play, compliance needs to be involved to ensure independent oversight. In many firms, surveillance teams are now large functions and empowered by a new breed of professionals that have come from the trading floor. These ex-traders bring a depth of product knowledge that can be useful for the surveillance of complex financial products.
The extent of integration
At present, RIMES’ and SOTERIA’s integration is about making communications data available to reviewers as they require. At present, it is up to the reviewer to decide whether or not they wish to bring in this data for investigation. However, the level of integration can go deeper in the future depending on the requirements of the market and what actually benefits end users. In the future it might, for example, be possible to integrate communications data into scoring methodologies, but this would only happen if accuracy could be guaranteed.
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