6 minute read 11 Oct 2017
How regulatory pressure help banks improve AML transaction monitoring

How better trader surveillance can help boost banks' performance

Authors
EY FS Insights

Minds Made for Financial Services

Glenn Perachio

EY UK&I and Global Assurance Trader Surveillance Solution Leader; EY UK Forensic Technology Leader

Experienced legal and regulatory industries leader working in digital technology and data analytics.

6 minute read 11 Oct 2017

The need for effective trade surveillance systems is pressing – both to meet regulatory requirements and to effectively manage risk.

Market abuse is a growing concern for financial institutions (FIs). Several high-profile events (the LIBOR and Foreign Exchange [FX] trading scandals, for example, as well as those connected with the manipulation of ISDAFIX earlier this year) have resulted in hefty fines for FIs – more than $19 billion for LIBOR and FX alone1 – pushing trader surveillance up the agenda. 

Trader surveillance is complex, however, and objective truth is hard to come by. The role of traders is to make money for their firms, and in practice the line between good behavior and abuse can sometimes be blurred. The process presents several challenges, such as extracting clear signals from the ‘noise’ of the markets and providing evidence of intent and market abuse without lengthy recourse to diverse sources of information. To make matters worse, among these sources is communications data, which is traditionally not well-integrated with trade monitoring systems. 

To fully address the challenges that they face around trader surveillance, FIs must leverage four success factors, which we have labeled ‘the ABCD of successful surveillance’:

  • Accuracy: More advanced and effective analytics – including integrated monitoring of communications and trading activity – to deliver better quality alerts across data types, asset classes and trades. 
  • Breadth: More effective and flexible workflow engines, and robotic process automation (RPA), to draw more information from a wider array of trading venues and asset classes. This can reduce the workload involved in investigating alerts and help FIs develop systems with improved drill-down capabilities, as well as the ability to analyze metadata.
  • Culture: Trader surveillance systems that work within a robust governance framework and the three lines of defense. These can reinforce a culture of compliance by delivering quantifiable information about front-office traders’ behavior within a conduct risk framework. 
  • Data: Integration, validation, cleansing and standardization, to ensure that the data FIs feed into their systems is accurate, and can be audited and validated across a variety of sources.

Key findings from the EY-Chartis research:

Trader surveillance report image 1
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  • About Global Trader Surveillance Survey

    As part of our research and analysis, this report includes the results of a 2017 global survey conducted by Chartis Research. It surveyed 35 FIs about their use of trader surveillance, and the challenges they faced in implementing it. Of the respondents surveyed: 

    • 37% were from Europe
    • 23% were from North America 
    • 20% were from Asia-Pacific. 
    • 20% were from the Rest of the World 
    • 20% were Tier 1 organizations (more than $100 billion in assets)
    • 23% were Tier 2 organizations (between $10 billion and $100 billion in assets) 
    • 57% were Tier 3 organizations (less than $10 billion in assets) Additional insight for this report comes from roundtable discussions and interviews with EY subject matter advisors.

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.

Conclusion 

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.

Summary

Trader surveillance is complex and challenging for global banks. But rising regulatory oversight and growing market abuse have made it a strategic imperative. A report from EY and Chartis Research outlines how banks and other financial institutions can help meet regulatory requirements through more effective trader surveillance. Download the survey (PDF)

About this article

Authors
EY FS Insights

Minds Made for Financial Services

Glenn Perachio

EY UK&I and Global Assurance Trader Surveillance Solution Leader; EY UK Forensic Technology Leader

Experienced legal and regulatory industries leader working in digital technology and data analytics.