RegTech Intelligence 
In our previous article Trade Surveillance: restructuring the business landscape[1] we identified how holistic regulatory requirements are forcing banks to re-consider the makeup of their operational structures. Our follow-up research has revealed the severity of the situation and how the industry is reacting too slowly.
Trade surveillance, if not executed correctly, can result in financial firms suffering significant monetary fines as well as serious reputable damage. This was demonstrated in the recent case involving IBUK where a failure in oversight lead to Suspicious Transaction Reports (STRs) not being submitted correctly. The severity of the £1 million fine has proved a ‘game-changer’ for financial firms in terms of how they prioritise meeting market abuse requirements. In particular, new holistic surveillance requirements under MAR and MiFID II require firms to pull data from various sources, which are often siloed in nature, and this is causing banks and investment firms to re-assess the structure of their business operations.
“Ultimately, regulation is putting pressure on investment firms to do two things: Firstly, to produce more ‘semantic’ information surrounding trades, thereby creating an integrated picture of a financial instrument’s activity, and secondly; to adopt a more proactive and preventative surveillance approach to identify a risk before it occurs.”[2] As a result, firms are looking to implement holistic trade surveillance solutions and controls that pull data from all of the separate data silos from within a firm, such as voice, e-comms and trading data. These new surveillance measures and techniques, however, are being adopted at a relatively slow pace with solutions being implemented gradually over time and in piece-meal.
There is currently an ongoing debate within the industry as to if (or when) firms will be able to achieve compliance with the new holistic requirements. Some firms argue that the available solutions are simply not advanced enough, whereas the reality is that most investment firms are too siloed in their makeup for any holistic solution to be developed and implemented effectively across all of the various sources of data. This is because most banks are built by acquisition, but even those that have experienced more organic forms of growth are still made up of isolated data systems to an extent.
Another underlying cause of the slow uptake of the available solutions is the poor quality of the data that firms are collating, deciphering and storing. Much of the data being captured through trade surveillance is often incomplete or out-of-date, and these inaccuracies need to be remedied before the industry can move forward. In some cases, required data is not being picked up by firms (for example, fixed income and FX order data required under MiFID II), without which most solutions are impossible to implement. Whilst potential remedies to the way firms store data are being considered, ‘data lakes’ or ‘cloud’ services being two examples, the industry is far from being in a position where data can be stored in a way that allows for frictionless deciphering.[3]
What all of this means for the industry is that “to achieve full-compliance under the rulesets, investment firms, particularly the larger banks, will need to completely breakdown and remodel their business practices in order to amalgamate large numbers of data silos”.[4]
The reality, however, is that investment firms are too risk averse and budget constrained to carry out the wholesale restructuring that is required. Many firms are still reeling from the amounts they spent attempting to implement MAR and MiFID II, and are therefore concentrating on individual components of trade surveillance rather than holistic ones, the result being that the industry is falling short in terms of holistic regulatory compliance. “Banks remain partly-compliant and would rather suffer fines for misdemeanours than rebuild their business structure and practises in a way that fits the post-crisis regulatory framework”.[5]
What the IBUK case has proved, however, is that regulators are becoming less tolerant of the status quo in terms of how firms are approaching their trade surveillance obligations. As things stand, we could be ten years or more away from seeing wholesale holistic compliance across the industry, and firms are putting themselves at risk if they continue to believe that they can adopt holistic solutions via an organic, evolutionary process. It is likely that we will see an increase in significant fines relating to trade surveillance, and therefore it will inevitably become clear to firms that they need to re-asses their approach.
The big question, therefore, is what can and is being done? Whilst some firms believe that things are unlikely to change – at least in the short-term – others are more optimistic. One major bank that we interviewed revealed that banks can and are beginning to focus their energy and resources toward tackling these issues, but that it will take time and that mistakes will be made. Many firms are employing structural architects to re-model the firm’s business operations in a way that links the isolated sources of data, and significant progress is being made in some instances (mainly by the bigger banks). Even the firms that have not yet found the necessary resources are developing long-term initiatives that aim to address the issues relating to holistic requirements.
What has become clear is that the required wholesale restructuring is inevitable across the industry, and that any bank that does not adapt to the new holistic regulatory landscape will undoubtedly put themselves at risk of failure. The benefits of adopting holistic operational structures is becoming clear to more and more departments within firms, meaning that the re-structuring process will ultimately from the top-down, rather than from the bottom-up. Cost is certainly an issue, at least for most firms, and the re-structuring may therefore come piece-by-piece, but the process will likely be accelerated as soon as firms realise the amount of money at risk in terms of fines.
JWG has several RegTech Special Interest Groups (SIGs) relating to Trade Surveillance, KYC/AML, and reporting and reference data, established to bring all parts of the industry together to discuss how to best match compliance challenges with the latest technological solutions. We will be covering the topic outlined in this article, as well as others, in our next Trade Surveillance Special Interest Group (TSS) to be held in late May of this year. If you would like to contribute towards these groups, either as a firm or a vendor, then please contact pj@jwg-it.eu.
[1] Trade Surveillance: restructuring the business landscape, https://regtechfs.com/trade-surveillance-restructuring-the-business-landscape/
[2] Trade Surveillance: restructuring the business landscape, https://regtechfs.com/trade-surveillance-restructuring-the-business-landscape/
[3] There have already been various Proof of Concepts involving the cloud, for which the FCA have declared their support.
[4] Trade Surveillance: restructuring the business landscape, https://regtechfs.com/trade-surveillance-restructuring-the-business-landscape/
[5] Trade Surveillance: restructuring the business landscape, https://regtechfs.com/trade-surveillance-restructuring-the-business-landscape/