Change in the air
The need for effective trader surveillance systems is becoming more pressing. So far, the default position for FIs has been to use systems designed primarily to meet the requirements of regulators. While regulations allow for a certain degree of flexibility when addressing trader surveillance, FIs are wary of distinguishing themselves too much from their peers – there is safety in being part of a group of institutions that all manage risk in the same way. As a result, there has been only modest technical advancement in this space.
Yet this picture is changing rapidly. Increasingly, rather than matching their trader surveillance capabilities to those of the bodies that regulate them, or even their peers, FIs are looking to establish their own leading practices. But why? And why now?
The key drivers of change are:
- Regulators’ desire for more ‘semantic’ information around trades. This has been driven largely by the Market Abuse Regulation (MAR). But it is emerging as good market practice, driving a more holistic approach to surveillance that encompasses electronic communications (e-comms) and trade monitoring.
- At the same time, regulators and market drivers are pushing many FIs to expand the remit of their surveillance to cover a broader range of asset classes, such as fixed-income, commodities, and other Over-the-Counter (OTC) products.
Meanwhile, new trading venues such as Organized Trading Facilities (OTFs) must be catered for. Across these new assets and venues, systems originally designed for more traditional, ‘regulated’ asset classes (such as equities) are struggling under the weight of an increasing number of trades, idiosyncratic reporting requirements, and the sheer volume, variety and velocity of the data involved.
- Trader surveillance systems are also generating thousands of alerts per day, more than FIs’ compliance teams can feasibly monitor. This is pushing up costs, as FIs expand their compliance departments with additional Full-Time Employees (FTEs) to keep pace. Not surprisingly, FIs want to increase the quality of their alerts, and speed up how they process them.
Future of trader surveillance
Most of the increase in spending in the sector is likely to remain tactical, focused on extending existing point solutions – including enhanced analytics and out-of-the-box reporting – or buying new ones. At the same time, there is also likely to be a low volume of very high-value transformational projects. These are likely to be undertaken by organizations in the upper-Tier 2/Tier 1 levels, which are seeking economies of scale.
These solutions will be complex, and the future of trader surveillance – with integrated conduct risk, advanced analytics, extensible databases, and integrated e-comms and trade monitoring – might seem complicated and difficult to implement. Nevertheless, FIs can develop a path toward the future by prioritizing certain elements and identifying specific solutions.
A target trader surveillance architecture should be able to deliver unified trade monitoring and e-comms monitoring data to the first and second lines of defense. This can be developed through phased, modular enhancements, beginning with basic data integrity and control processes. A system covering each of these areas can then provide a centralized data repository to manage additional related data, including conduct risk data, HR data, and P&L data.
As our survey shows, firms struggle to provide effective monitoring of all business lines and requirements, and cultural and governance processes form a vital part of a successful system. The scale and scope of FIs’ requirements are expanding quickly, and the need to refresh their technology has become more pertinent in recent years.
Trader surveillance budgets and expenditure may have expanded, but there is no guarantee that their systems will address systemic deficiencies. FIs should work to the ABCD principles to deliver broader, more effective and more efficient surveillance. Their systems should continue to evolve, covering more areas, detecting more breaches of compliance, and generating better alerts.
Ultimately, by linking all the elements and integrating sources of information to leverage more insight, FIs can break down the barriers between the different types of surveillance. They will know their traders, understand their employees, and recognize how they make their profits. Better monitoring will enable FIs to use highly skilled resources more effectively, by delivering more high-quality alerts to individuals.
Today, trader surveillance is a complex area of an FI’s operations. But by addressing the ABCD of surveillance, and adopting the right balance of people, processes and technology, FIs can emerge from the confusion and bring new insight – and value – to the way they work.