Keeping the lights on in trade surveillance

By Nick Gordon | March 8, 2017 | Categories: Blog | Tags: , , , ,

Following the deadline for adhering to Market Abuse Regulation (MAR) back in July last year, you couldn’t have blamed European banks for putting a tick in the box, breathing a sigh of relief and turning their attention to the next regulatory hurdle. But they’d be wrong.

Once the initial implementation is over with, things don’t just stop there. Surveillance is a 24/7 activity and financial firms continue to evolve and change, as do the regulations. As a result, legal and compliance teams cannot sit back and relax once they have implemented a surveillance system – new requirements constantly emerge and have to be programmed into the everyday running of the business.

The introduction of the Senior Managers’ Regime (SMR) in March last year has added a new dimension to business as usual (BAU). It means the threat of conviction amongst the senior team for breaching trade surveillance regulation has grown considerably. The SMR stipulates that financial firms must draw up lines of responsibility for trading activity, meaning activity has to be monitored, so the people responsible know if the areas that fall within their remit are at risk or in danger of being non-compliant.

So what are the best practices a financial firm can put in place to ensure the organisation stays on the right trade surveillance track when a system is up and running? Some key ones:

  • Establishing ownership: to avoid ambiguity and get the right trade surveillance solution in place, it should be an initiative that is owned by the front office, driven by compliance and delivered by IT. In terms of defining requirements, setting parameters and establishing the right reporting, the business has to “own” the trade surveillance operation, especially as they are the ones who will live with the consequences of getting it wrong.
  • Governance: generally, it’s the onus of the legal and compliance teams to monitor the regulation, be mindful of the advice from regulators and see what’s happening in the industry, so they can keep up to date with any changes. There has to be an ironclad governance structure in place, with clear lines of responsibility.
  • Picking the right technology and processes: to keep trade surveillance systems running on a day to day basis, the right systems and processes have to be in place. For example, automated surveillance is invaluable. The level to which firms automate trade surveillance will largely be down to the budget and size of the firm, but generally speaking, automated systems can support statistical metrics and be used to establish trade monitoring thresholds, a vital measurement for ensuring compliance.
  • Understanding the risks: lots of new people with compliance backgrounds have entered the fray with MAR and MiFID II. They are not quantitative analysts, so do they understand trading mechanics? Do they have a real understanding of the business? They need to if they are to operate a trade surveillance system.

The head of Goldman Sachs, Lloyd Blankfein, recently admitted that his number one concern was contravening regulatory regimes through the misbehaviour of a rogue employee. This highlights the issue that even with all the regulatory processes in place, if an errant employee is determined to break the rules, a firm might not be able to stop them.

But asking the right questions, conducting the right risk analyses and putting best practice systems and processes – like governance – in place to make sure trade surveillance runs like clock work is a good step towards firms having the confidence they are doing the right thing. One things for sure – the regulators will be watching.

Read the report from TRG on Keeping a watchful eye: best practices for maintaining trade surveillance.