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Market abuse surveillance in demanding markets

Karan Dalwani
Karan Dalwani
Trading Specialist, Refinitiv

Market abuse surveillance places huge demands on financial institutions. Faced with multiple communication platforms and thousands of messages every day, how can compliance teams get a unified view of trading activity especially in the demanding markets caused by COVID-19?

  1. Market abuse surveillance tends to be executed in silos, with each system and monitoring team raising its own suspicious behavior alerts.
  2. Regulations such as the Dodd-Frank Act require financial institutions to produce all documents or communications within 72 hours.
  3. Recent events have forced market participants to adopt widespread alternative working patterns, raising extra challenges to monitor their trading communication in a compliant way.

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Market abuse surveillance has been pushed up the agenda after the LIBOR and FX trading scandals resulted in hefty fines of more than US$19 billion for financial institutions.

The market abuse surveillance process, however, presents several challenges, such as extracting clear signals from the ‘noise’, and providing evidence of intent and market abuse without a lengthy recourse to diverse sources of information.

The widespread adoption of new e-communication channels and social media has inspired businesses in every industry to use platforms like LinkedIn, Twitter, and other instant messaging services to reach potential customers, connect with current customers, and build community.

To make matters worse, most of these channels come with their own archiving mechanisms and surveillance protocols causing a massive data fragmentation for financial institutions.

Surveillance is executed in silos — with each system raising its own disparate suspicious behavior alerts that are tracked by separate surveillance teams.

Each team, therefore, lacks the capability of intelligently linking various pieces of structured and unstructured data and creating a cross-market, and cross-communication, channel view of the financial activity to portray trading behavior.

Current market challenges. Market abuse surveillance in one archive

Recent market trends

The disruption caused by the drastic measures taken to slowdown the rate of coronavirus infection has introduced new challenges for the business community. It forced firms to resort to unconventional communication channels to maintain business continuity as majority of the staff was asked to work from home.

Many regulated firms that have strict policy of using only the traditional communication channels are embracing this new normal and reviewing their business continuity strategy. The challenge, however, is to effectively monitor activity across these channels.

Thus, there is a need for a tool that can consolidate the data from all possible channels and store trade tickets alongside other communication objects such as e-comms, voice and files (images, audio or PDF documents), to help compliance teams detect problems and act accordingly.

Unified archiving across information channels. Market abuse surveillance in one archive

Market abuse surveillance

Each day, businesses across the globe generate billions of electronic records in the form of trade transactions, emails, instant messages, and voice communication.

Most often the firm’s compliance staff are responsible for making sure that those records don’t put their organization or customers at risk.

Since reading every communication would be far too time consuming, building an effective compliance review process that strikes a balance between relevance and quantity is key.

Random sampling can keep the number of messages to be reviewed at a reasonable rate but it also leaves the compliance review process entirely to chance. A better approach would be to use advanced policies designed with flexible criteria to ensure a manageable number of results.

These policies will only be applied to the desired participants, trade directions and other criteria in conjunction with the robust lexicon list to return the most relevant content for the reviewers.

Avoiding false positives

Enhancing the focus of the policy can significantly optimize the number of flagged messages for review. Introducing even more additional criteria helps in reducing non-relevant alerts.

Policy refinement is an ongoing process, even with well-designed supervision policies. However, with the right tools, it is possible to quickly identify problematic policy elements that cause false positives and iteratively improve policies in response to changing conditions.

Our newly launched solution, Refinitiv Compliance Archive is an example of how utilizing advanced flagging rules to combine keyword lists with other criteria to build advanced policies can make a big difference.

Meeting regulator demands in time

Rapid adoption of social media platforms such as Facebook, LinkedIn, Twitter and other instant messaging tools have forced businesses to consider joining the conversation or risk being left behind.

However, in the financial industry, strict regulations create compliance and legal risks that firms must address before using these channels.

Many regulators today require firms to detect and report abusive behavior in a timely manner and have preventative solutions in place.

The Dodd-Frank Act trade reconstruction requirement, for example, is quite challenging and requires financial institutions to produce all documents/communications related to a trade/e-comm chronologically (with accurate time stamps) within 72 hours of the regulator’s request.

Given the current manual and labor-intensive processes of many financial institutions, extracting the data from multiple channels, generating a detailed report and performing a legal review before sharing the information with regulators may take several weeks.

Improved record keeping and workflow

Over the past few years, many regulators across the globe have begun expecting financial institutions to have holistic surveillance in place that leverages multiple data sources for efficient monitoring and reporting.

Global relay ediscovery process. Market abuse surveillance in one archive

It is a heavily regulated market and firms are asked to meet the complex record keeping, supervision, privacy, and data security requirements of the SEC, FINRA, CFTC, FCA, MiFID II, and GDPR.

As pressure from regulators increases, firms must develop work-frames to stay compliant, organized, and in control of their data — while reducing legal and regulatory exposure.

How can they do this? By simplifying traditional electronic discovery processes, and by eliminating the need to collect data from multiple sources, reducing the turnaround time from a few weeks to just a few hours, to preserve a clean chain of custody and reduce eDiscovery risks and costs.

Better supervision metrics

Depending on the size of the firm, the compliance team may be responsible for reviewing thousands if not millions of messages entering and leaving the organization.

A compliance activity report should give teams the ability to see all activity across the entire archive or provide key metrics such as average message volumes and hit rates by user as well as groups.

Firms need comprehensive tools that allow to better monitor policy activity, supervision metrics, policy performance and change events.

This is where tools such as Refinitiv Compliance Archive, a software-as-a-service model can ensure scalability and improved uptime without the added cost of purchasing redundant and frequently idle equipment or employing the necessary people to run that equipment.

Refinitiv Compliance Archive: Reconstruct, supervise and analyse your message and trade activity in an efficient and compliant way, in one unifying portal

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