On June 20, RIMES hosted its third Client Conference. In the final session of the day, Spencer Mindlin, Capital Markets Industry Analyst at Aite Group, moderated a panel discussion on trading surveillance, with panellists including Bradley Bennett, Former EVP and Chief of Enforcement at the Financial Industry Regulatory Authority, Steven Ducker, Chief Compliance Officer at QS Investors, and Scott Burke, Regulatory Product Manager at RIMES.
The session started with a reminder of some of the findings of research carried out by Aite Group into the subject of market surveillance technology, which was conducted late last year. According to the research, the compliance teams at financial sector firms are focusing most of their attention on market surveillance. The research also showed that the technology choices made by firms play a very important role when regulators come to audit. The research revealed three key themes:
- AI and behavioral analytics are increasingly defining best-practice in market surveillance
- Firms are looking to secure a holistic surveillance capability
- Firms are looking to leverage the cloud to reduce the cost of surveillance systems.
As we are currently in a long-standing bull market, many of the things that trigger close regulatory scrutiny, such as client complaints or arbitration claims, are not present. However, a market correction or a change in the political climate could quickly change this state of affairs – as could a push for the use of big data by regulators.
Big data drives scrutiny
The latter is well already underway with monumental initiatives like the Consolidated Audit Trail (CAT), which will track orders throughout their lifecycle and identify all market participants involved. The CAT will provide regulators the ability to link data across markets for a complete view of activity and improve their ability to identify market abuse through qualitative analysis. Big data provides regulators the ability to vastly improve the identification of complex cases of market abuse and insider trading. Firms would be well-served to monitor their own conduct in the same manner.
Data analytics will also change the way regulators conduct examinations and investigations. Traditionally, regulators have applied a tick-box approach to exams, managing to specific rulesets. Now equipped with big data engines to tie activity across firms and markets, regulators first request a firm’s data for a period of time and analyze it against broader sets. They become armed with insights and questions based on this analysis. Firms need to ensure they have their own analytics capabilities in place to keep ahead of the regulators and get on top of issues before they become real problems.
Next, the panellists discussed the central importance of compliance teams for due diligence. Onerous counterparty and investor due diligence requests are focused on how firms monitor their activity. Compliance officers are now routinely asked to attend due diligence meetings with investors, during which the conversation is usually dominated by questions around market surveillance. Having in place advanced systems that allow the team to come armed with information and insights to these meetings is proving highly beneficial.
Focusing on the different regulatory environment between the US and Europe, it was agreed that while there is no one overarching market abuse regulation as with MAR in Europe, the many elements of US law, including fiduciary responsibility and code of ethics rules, amounts to the same thing. As in Europe, regulators are just as interested in what systems have been put in place at firms as they are in investigating suspected cases of market abuse.
The session concluded with a discussion around the evolution of what surveillance is and the capabilities RIMES provides in this space. Combining traditional rules-based approaches with patterns-based analysis, RIMES RegFocus products bring a flexible approach to market surveillance that is tailored to the unique business requirements of firms and able to adapt over time as these, and the regulatory regime, changes. RIMES provides firms the ability to rapidly respond to regulators when asked and to build a comprehensive compliance narrative around the activities that take place within their purview. This approach keeps firms ahead of the regulators without having to increase headcount.
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