The relatively new requirements to record mobile phone conversations relating to trading transactions are giving the industry a lot to think about. The focus on compliance is stronger than ever with record fines and compliance officers having personal liability if oversight is not in place to monitor for trading transgression.
Meeting the challenge is no simple, straightforward task. Regulation requires full trade reconstructions across all channels both voice and data, to establish the facts relative to a given trade.
The first step is to record all media (instant messages, texts, email and voice), store and archive – applying specific rules for retention. The second step is to analyse all of the data and align conversation threads to specific deals. And the third is to collate and present, on request, all relevant data to regulating bodies within a rapid time frame.
Trading institutions aim for compliance in a transparent, cost effective and timely manner.
There are differences in regulatory demands across territories, but all broadly aim for greater transparency in the way trades originate and are executed. In the UK, the Financial Conduct Authority has extended the requirements of the European Markets in Financial Instruments Directive (MiFiD) for fixed line voice recording to include all electronic communications to and from mobile devices concerned with receiving and executing client orders or transactions. This impacts traders, front and back office advisors, settlement and private banking staff, and recordings must be retained for six months.
In the US, the Dodd Frank Act of 2013 requires that, upon demand, voice and data – emails, instant messages, text messages and trade processing – relative to a specific identified trade be made available and presented. Information must be in a suitable format so that it can be reviewed to confirm that traders took appropriate action to achieve the best price at the appropriate time.
In the future, the impact of the regulators worldwide is expected to extend even further, creating a far reaching and complex regulatory reform framework with requirements impacting almost all traded entities in financial services.
Differences aside, the regulations have been laid out. And with limited benchmark cases, the interpretation of the rules can be somewhat subjective. Until companies are asked to demonstrate that they are compliant with the regulations, they cannot be certain that any particular solution used will suffice to meet the regulatory requirements. Fearing the risk involved, some have chosen to implement a policy of disallowing mobile phone use for trades altogether, but as this restricts productivity it is an unsatisfactory solution. Plus it is unlikely regulators would be satisfied that having such a policy in place equates to compliance should mobile trading still go on regardless.
Systems put in place need to be dynamic and flexible enough to change to implement new regulatory rules or adjust as required for different geographies, roles and asset types.
The intent is to avoid over-compliance – which would be prohibitively expensive in infrastructure and resource – and under-compliance – which could be even more costly in fines and reputation should a solution or an approach fall foul of regulatory demands.
Most trading institutions have basic recording facilities for traders’ desk phones, and have for some time. To meet requirements for a complete series of communications that define an entire scenario – who was implicated and why – though, requires increased functionality. Making the right solution choice is not an easy task. A phased approach is likely to be the most cost-effective, as is the adoption of an agile solution that can flex to adapt to new rules over time. Companies need to understand and weigh up costs for recording, storage, analysis and presentation of the information.
Working with a vendor with experience and understanding of the business is a must. To analyse unstructured data, comprising voice and text, is difficult. The temptation is to convert voice to text. However, doing so loses the tone and pitch of the interactions and voice-to-text conversion is difficult when recordings have been made in a noisy environment.
The foundation for tools-based analysis today is based on:
Using such tools helps reduce the need for manual intervention. However, substantial human resource is still required. Technology that can completely analyse meaning, nuances, subtleties and implied meanings in communications is in a formative stage and certainly cannot be relied upon 100 per cent of the time. Meanwhile understanding the significance of ‘non activity,’ such as the timing of calls, is difficult to automate.
‘Bring your own device’ (BYOD) can of course cause further problems. If the deployed auditable solution is application-based, compliance could be circumvented by the use of alternative devices that don’t have the application or OTT communications.
Once all data communications are aligned and key transaction trade flow is available, institutions are paying considerable amounts for the lawyers’ interpretation.
The demand for transparency is a clear intent from the regulators and the industry needs to be prepared. Products exist to help IT departments grappling to meet the requirements in a timely manner.
Technology solutions providers will need to continue to develop and adapt their products to meet the challenge of communications compliance. The systems provided will need to be rules orientated to adapt to change, and regional directives.
The provision of voice communication capabilities is fast becoming a commodity. It is the management of voice interactions that is critical going forward – software solutions that make the data of communications, including recorded conversations, useful and that automates the collection, organisation and analysis of the data so that connections and linkages can be made. Agility and flexibility are critical here, as is delivery by experienced teams who understand the needs and drivers of the financial trading markets.
IPC provides trading communications solutions to the global ﬁnancial services community. IPC’s offerings include the ﬁrst uniﬁed communications/application platform, award-winning hard and soft turrets, electronic connectivity services, enhanced voice services, business continuity solutions and day-to-day system management and monitoring services.