By Israel Hersh, SVP Business Development, tekVizion
When a major institution bank was fined for failing to record calls for three weeks after installing a software security patch in one of its offices in 2014, it was hit with a $1 million fine by the US Commodity Futures Trading Commission. Thus, trading compliance was thrust firmly into the spotlight.
From video and phone calls to chat rooms to email, banking regulators globally have fought constantly to have effective oversight of the communications channels, resulting in a clamp down on unscrupulous traders set for cheating the system. The compliance analytics industry was created and banks acquired and deployed the applications with the objective of early detection of fraudulent trades or other misconduct in trading. These products analyze recorded data that consists of voice, email, and texting communication. In other words, if data or voice are not recorded, compliance applications are deemed useless.
But let’s be clear – this isn’t just about stopping the tiny minority who are committing fraud, it’s about creating a level playing field where all parties are protected, where trading transparency is paramount, and where a single record of truth is created in case of future confusion or disputes over the intricacies of a trade.
In the world of fixed income, commodities and currency (FICC) trades, voice trading reigns supreme. These highly complex financial instruments are the opposite of straight forward; they require long and detailed negotiation and definition. In short, they need explaining.
When there’s room for small print in contracts to be argued over, everything must be made important. It’s critical that every step of creating the trade is known, from the preamble to the trade to the final contractual element.
Mifid II requires comprehensive and fool-proof recording and archiving of all communications relating to a trade. Thus, every bank must record all calls which will/may result in transactions, notify the customer that the conversation is being recorded, and store all these recordings for a minimum of five years. Lastly, they must be able to quickly retrieve, upon request from the regulator, all communications leading up to a specific transaction or in a given time period.
Put simply, if a trade needs explaining, it needs recording. What’s more – and on this MiFID II is clear – you cannot trade if you cannot record the trade.
Large players in FICC trading have trading volumes in the billions of dollars per year, meaning every minute a system is shutdown translates to substantial losses. A malfunction of the recording system will quite literally silence a trading floor, costing a bank in excess of $9 million per hour in lost revenue.
So what reasonable steps can a bank take to ensure their voice recording systems are functioning properly, certifying their traders can keep trading?
As the Head of Global IT Compliance at a Top 10 Global Investment Bank put it: “MiFID II will require all ‘communications that are intended to lead to a transaction’ to be recorded, so solid compliance monitoring and system health checks are key to early identification of potential risks, non-compliance trends and recording failures.”
However, for many banks the solution until now has been all testing of the voice trading systems to be done over the weekend, with the Ops team having to quite literally walk the floor to validate the functionality of every Turret on the floor. But there’s a problem with this. The ops team can make calls to check the endpoints are working and – if they are lucky – they’ll have sufficient time to also check whether a few of these calls were recorded. Still, this does not mean that the recordings will be functional on the days that follow. Any change in the network or provisioning of the product could lead to lose of recording.
Just because the proverbial ‘red light’ is flashing on the call recording system, doesn’t mean the system itself is recording properly. You can’t record silence; you need to record live traffic.
To ensure compliance, testing must be done daily and cover every Turret on the trading floor. Period sampling may no longer be a “reasonable effort” in the eyes of a regulator, leaving banks potentially exposed to significant compliance risk.
This daily testing of live systems would be a time-consuming and costly operation – were it not for automation.
Augmenting and enhancing the testing of these high-leverage systems with solutions, such as tekVizion Automation, can dramatically mitigate risk and reduce the cost while increasing the coverage of testing. Nightly automated and proactive testing means issues are identified before they impact a trader and the bank’s senior management are kept fully informed together with steps taken quickly to correct the issues.
This gives the bank peace of mind – knowing it has the data to quantify the outages to the regulators, and therefore, assist in avoiding any costly investigations and greatly mitigate the risk of potential fines for non-compliance.
For more information on how automated testing can help keep a trading floor online and compliant, go to https://www.ipc.com/resource-center/ipc-and-tekvizion/
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