Surveillance – specifically trader surveillance – in financial services institutions remains an area of focus for Compliance professionals in 2023. Generally comprising a combination of trade and communications (voice and eComms) monitoring, trader surveillance is driven primarily by regulatory demands.
While there are specific obligations for trade surveillance set out in regulations such as EU’s Market Abuse Regulation (MAR), the US’s Dodd Frank Act (DFA) and Singapore’s MAS-SGX best practice guide, the requirements for communications monitoring are less well- defined. Although MiFID II and DFA mandate the recording of communications and so-called ‘trade reconstruction’, the monitoring of communications for market abuse, while explicitly required in some jurisdictions, is not stipulated in detail, and this has resulted in a greater variation of process across the globe.
That said, there have been a few notable instances in the US recently where firms have been fined for failure to properly manage communications. In the UK, the Financial Conduct Authority (FCA) has reached out to compliance teams in several global financial institutions in a fact-finding mission to ascertain each financial institution’s approach to the use and surveillance of its employee communications channels. This suggests that financial institutions are likely to increase their focus on communications monitoring in the coming months and years in response to closer regulatory scrutiny.
The other major driver affecting change in the surveillance space is technological. The landscape has shifted significantly in the last few years with advancements in big data, cloud technologies and artificial intelligence. Machine learning and natural language processing (NLP), which GreySpark Partners has written about in detail in the past, have made it possible to automate both trade and communications surveillance in a way that simply would not have been possible before.
Finally, the burden on surveillance teams continues to increase as business and working practices evolve. A recent example is the employee utilisation of more numerous communications channels in the post-Covid-19 world, which has enormously increased the complexity involved in effective communications monitoring.
The bottom line is that trade surveillance processes must keep pace with innovations in trading products and methods, and all this takes place in the context of the continual drive by financial institutions to streamline and improve processes across their organisations. In this article, GreySpark discusses the drivers for financial firms to assess the effectiveness of their surveillance solutions and to explore the potential advantages of integrating specific aspects of their trade and communications surveillance.
The Myth of Holistic Surveillance
‘Holistic’ has been a buzzword on the lips of surveillance professionals for several years now – and, at a high level, each of them understands it to mean roughly the same thing – surveillance of trader activity using both trade and communications data to detect fraudulent activity, market abuse and misconduct. Many might even extend the definition to include use of supplementary data, such as, say, building entry logs or personal location data to enhance the results of the process.