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Implementation of Market Abuse Rules Exposes Gaps in Communications Monitoring

This article first appeared in Banking Technology, 20th December 2016.

Since the Market Abuse Regulation (MAR) came into effect in July 2016, our ongoing conversations with banking organisations indicate that whilst the regulation is aimed at improving market integrity, it has also exposed inefficiencies within some banking monitoring systems. Banks are struggling to incorporate complete data sets from organisational silos and disparate electronic communication channels.

MAR requirements

Under MAR, firms are required to deploy monitoring systems capable of deferred automated reading, replaying and analysing of historical orders, order edits, order deletes and trades. And in an update from the previous Market Abuse Directive (MAD), firms also need to be able to track, record and report intended market abuse. This Suspicious Transaction and Order Reporting (STOR) requirement means that suspicious ‘orders’ need to be reported, over and above the original ‘transactions’ that were required under MAD.

Processing pitfalls

Silos common to today’s banks, between asset classes, structured and unstructured data, and different divisions within the organisation, can often hinder both proactive surveillance as well as exploratory reviews. When organisations are dealing in different asset classes, the surveillance of voice transactions, monitoring of different systems, and putting everything onto the same timeline can be quite an onerous task. Ideally, surveillance systems need to be able to integrate cross asset class, different OMS systems, market data sets, and research departments with individual recommendations, onto a single platform.

Electronic communication systems are also proving to be particularly troublesome. Under MAR, firms need to have the exact timestamp of an order, be it placed either electronically or through a phone call. Calls are often recorded in poor quality as a result of inferior sound quality and single line recordings, making it tough to isolate one person’s voice or minimise noise interference. Telecoms systems with high definition sound quality and multi-channel recordings need to be incorporated into surveillance platforms as a result, to increase the quality and reduce the burden on the compliance team. Additionally, in today’s international environment, calls can be conducted in many different languages with people switching languages midway in conversation. Systems also need to be able to automatically detect and switch language halfway through.

Furthermore, communication channels such as Instant messaging services need to be included in monitored lines of communication. As well as popular messaging tools such as WhatsApp and Skype, coverage will need to be made of any new secure social media platforms for financial institutions.

The best way of securely meeting compliance obligations is to ensure that recordings of all communications be multi-channel, with the incorporation of high-level speech recognition and multilingual processing. This is typically achieved by combining best-of-breed technology rather than use of a one-stop shop.

FICC market examples

The fixed income, currencies and commodities (FICC) markets serves as a good illustration of both known silo issues, as mentioned above, and further unknown gaps. Asset classes such as fixed income, currencies and commodities require an alternative treatment altogether due to their different characteristics. Firms need to be confident that the idiosyncrasies of the FICC markets are being accurately reported, such as all potential ‘intent’ scenarios in request for quotation (RFQ) processes used in FICC markets.

Surveillance systems ideally need to cover the following for FICC markets:

  • Fixed income – the ability to review ‘last look’ scenarios, helping desks evaluate true liquidity, be it from a dealer or buy-side counterparty perspective;
  • Currency markets – capability of dealing with all the various tiering and FX benchmarks;
  • Commodities markets – commodity-specific instruments, with all of their complexity, need to be correctly modeled, and relevant market data and news needs to be sourced.

Automated surveillance is a requirement

European regulators require that banks install automated surveillance systems since they provide the only capable method for analysing every transaction and order, individually and comparatively, and producing alerts for further analysis in a structured workflow.

Yet banks are beginning to recognise that their legacy market surveillance solutions cannot cover the new regulatory requirements, specifically around market abuse logic (intent), breadth of asset classes, and recording capabilities.

From our experience, a surveillance system needs to be flexible with the ability to integrate alongside other best-of-breed focused solutions, such as new-generation voice recording and speech recognition technology. The key is installation of a system that can contextualise across all existing silos including communication recordings, so that complete data sets can be processed in context of the same timeline. Because in today’s world of banking compliance, there is no room for gaps.

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