On October 17, RIMES hosted a regulatory seminar in London. In the first session of the day, Octavio Marenzi, CEO of Opimas, a research firm, provided an overview of the surveillance market in the US and Europe, based on a survey of compliance officers from more than 150 buy- and sell-side organizations. The following article summarizes the insights covered in the presentation.
Regulatory oversight increases
Compliance Officers globally were surveyed by Opimas on a variety of regulatory concerns and whether they considered each a priority for their own programs. Areas of concern flagged by the research include market manipulation (cited by 75% of respondents), conduct violations (38%) and insider trading (28%). For all three, trade and/or communications surveillance play a key role.
This focus on surveillance comes as regulatory requirements around surveillance have increased through MiFID II and the Market Abuse Regulation (MAR) in the EU and Dodd-Frank in the US. The regulatory requirements in these two regions have significant overlap, with requirements aiming to eliminate the same core behaviors and creating the equal need to both monitor activity and respond to regulatory requests. These include, for example, a requirement for tamper-proof archiving of transactions and communications data and the reconstruction of trade orders on request.
It would seem apparent that through heightened regulation, and subsequently more severe enforcement actions, that a firm would need to ensure it is monitoring both trading and communications. Rules are increasingly non-prescriptive, however, and it is difficult to determine appropriate standards for communications and transaction monitoring based on regulatory enforcement action alone. It is often the case that enforcement actions will be publicized years after the actual behavior has occurred, and both practice and protocol will have shifted. The ‘between the lines’ message of these regulations is seemingly not to just manage to the specific ruleset, or do what others have done, but to tailor your monitoring program to your specific business model and risk profile. To do so properly requires leveraging transaction and communications monitoring to the fullest extent.
The complexities of surveillance
As supervision and compliance teams look to strengthen their surveillance capabilities to respond to this need, many are challenged by siloed communications and order/execution management channels and systems. When it comes to communications surveillance, the proliferation of channels such as mobile voice, SMS and chat present new challenges beyond the basic archiving of emails. On the trading side, every additional source system, execution system, region or asset class brings with it nuances difficult to understand and track by those not involved daily. The complexities present a further challenge in that the quality of monitoring lies in the ability to connect communications with transactions. This directly impacts firms’ abilities to both conduct routine monitoring and reconstruct trades when required to by regulators. This challenge often leads firms to stall when implementing the proper technology around certain assets or business lines.
The sell-side of the market has been forced to figure out the complexities of these two areas of monitoring, at least in part. Traditionally facing the brunt of scrutiny for surveillance, broker-dealers have had to implement a first generation of communications and trading surveillance platforms that, while not perfect, have given some capability. Regulatory capability and focus is shifting through new regulation and technological advancement, and the buy-side is now feeling the pressure to monitor its behavior in the market to the same extent.
In the area of trade surveillance system adoption, the sell-side is also well ahead of the buy-side. In the EU, some firms have not yet responded to the requirements of MAR. This depends on their location. In some counties, there is a misperception that regulators will not enforce MAR on the buy-side, while in others, such as in the UK, it’s clear that the regulators are looking to crack down on non-compliance. Organizations that have not put in place surveillance systems are putting themselves at significant risk.
Compliance officers can help build a case for significant investment in surveillance systems by highlighting their benefits outside of compliance. For example, 60% of the firms surveyed by Opimas said that they’re planning to implement a surveillance system to help provide the business’ management with oversight of interactions with customers. Fifty-five percent said they will use their surveillance capability to better identify opportunities with clients.
One of the most challenging yet critical aspects of communications monitoring for all parts of the market is voice surveillance. When it comes to voice surveillance approaches, most compliance officers use random spot checks, where a small proportion of recorded calls are played back to a compliance officer listening in to detect suspicious conversations. However, this approach is ineffective as most calls go unmonitored. Even when calls are monitored, illegal behavior may go unnoticed due to human error or the use of esoteric language by traders. What’s more, the approach relies heavily on manual processes and so it is much more expensive that automated alternatives.
Some firms are looking to a slightly more advanced model: voice-to-text, where voice calls are turned into text that can be more easily analyzed. However, only a very small number of compliance officers are using highly advanced surveillance technologies such as voice biometrics, emotion detection or auto-language detection.
This year, spending on surveillance is expected to reach $1.3 billion across communication channels and trade surveillance. Budget priorities include improved asset class coverage, expansion of Ecomms channels under surveillance and a reduction in false alerts. In terms of the latter, automation is seen as key. In fact, automation is viewed as core to meeting future compliance goals. For example, 41% of compliance officers want to see the automation of trade reconstruction, a capability that would enable them to generate reports for regulators at the push of a button
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