On November 18, Scott Burke, Regulatory Product Manager at RIMES, took part in a debate on market surveillance, which was convened as part of the XLoD virtual event. Alongside compliance experts from leading asset management firms, Scott discussed some of the major trends surrounding market surveillance. What follows is a summary of some of the main points raised during the debate.
COVID-19, home working and the impact on surveillance
During the early months of the pandemic, market volatility caused trading volumes to increase dramatically, which drove up surveillance exceptions and alerts. The pandemic created the perfect conditions for bad actors to try and hide market abuse, and compliance teams had to focus their efforts on this area.
Since then, existing methods for supervision and compliance modelling are having to adapt to a world where people are working from home most or all of the time. To address this challenge, firms should focus on culture, and look to create an environment where people want to do the right thing, regardless of whether they think they’re being watched. Education and training around expected behaviors is essential.
Over the medium term, the pandemic will likely accelerate the adoption of advanced compliance technology. This is in keeping with what we have seen in the past across a range of sectors. Seismic events drive technology adoption as companies look to adapt. This adoption subsequently leads to a new ‘golden age’ of technical capability. It’s hoped that this will now happen with market surveillance, as the pandemic puts a spotlight on how firms can improve market surveillance to meet the challenges of a distributed workforce.
Upgrading legacy models to evidence regulatory compliance
Buy-side firms are looking to evolve surveillance monitoring to meet increasingly stringent regulatory oversight. This is particularly the case when it come to communication surveillance, as firms look to adapt to the proliferation of communications platforms.
Embedding a culture of compliance is essential to ensuring compliance, and leveraging technology is a main route to arrive there. Manual controls need to be replaced by automated controls to ensure compliance officers have full control over their data and can focus on actually assessing the data instead of spending time cobbling it together. Firms should look to build a holistic picture by integrating trade and communications surveillance tools and underpinning the approach with high-quality data.
Asset managers are also bringing Subject Matter Experts with experience of the front line into the compliance team, as such experts can provide invaluable insights into what certain alerts may mean.
When building a surveillance system, it’s essential to ensure that a firm’s approach aligns with its unique business profile. If the technology fails to line up against business risk, compliance teams may create unnecessary work for themselves, and will find it difficult to find the right balance between culture and controls. And if the technology fails to deliver, compliance teams may find it difficult to secure budget for future initiatives.
Data is also critical. The data used in surveillance systems must be valid and complete. If there are any blind spots in the data, things can be missed. If these are subsequently picked up by the regulator, firms risk undermining their compliance culture. Organizations should aim for smart and scalable implementations that adapt to their changing risk profile.
Questions of culture
Global asset managers are tasked with identifying suspicious behaviors across different languages, cultures and regulatory jurisdiction/rules. To ensure that nothing is missed, firms should consider a local compliance and supervision capability to supplement their centralized resource. The distributed workforce model being enabled by remote and home working means that this local capability is now easier than ever to manage as part of a wider compliance effort.
Language is of particular issue. Until AI is able to translate communications with 100% accuracy and flag all exceptions, firms need to do what they can to bridge any gaps in communications surveillance monitoring. One way to do this is to attach confidence rating to tools like translation technology, as that allows you to manage the risk that something might fall through the net. Lexicon management is also a useful tool as an up-to-date lexicon helps ensure that the communications monitoring alerts are calibrated to respond new slang or emerging terms.
Surveillance solutions – build vs. buy
Firms should consider both the systems available to buy on the market, as well as the in-house resources they can bring to bear to identify suspicious activity. The vendor market is responsible for ensuring that services are in tune with current market needs. Market participants, on the other hand, are responsible for keeping technology providers appraised of what technology is required.
Every organization will be different, but the aim should be the same: buy the best technology you can, and then fill in any gaps with in-house capabilities. Do this knowing that automation is now the expectation. Certainly, firms without automated systems will have struggled to cope with the increase in trade volumes seen during the recent market volatility.
Sell- and buy-side monitoring approaches converge
When sell-side organizations set up compliance monitoring and surveillance systems many went too far. There’s now a shift back where banks are scaling down, although not weakening, their surveillance tools to ensure they’re as effective and efficient as possible. Banks are moving towards strong lines of control supporting feedback loops that support a strategic approach to surveillance.
The message from global regulators is that all firms are market participants, regardless of whether they’re from the buy- or sell-side, and they will likely face more aggressive enforcement soon.
Surveillance across different products
To ensure that surveillance capabilities work equally well for all products and asset classes traded by asset managers, firms need a good understanding of these products and their various risks.
First, firms should conduct a risk assessment, including a life of order review to understand who trades what, where, the mediums they use and how they clear and settle. The aim should be to understand what’s normal for each instrument and how they can best structure surveillance around that, identifying where automation can be used to drive efficiency.
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