Archives: News Room

This article was republished with permission by the copyright holder, Thomson Reuters. It first appeared in the Thomson Reuters Regulatory Intelligence subscription service for compliance and risk professionals.

Written by Richard Satran for Thomson Reuters Regulatory Intelligence – first published on April 19, 2017.

A wave of financial services deregulation promised by the administration of U.S. President Donald Trump has so far had little impact on decision making by top risk and compliance officers, a survey at a major industry conference last month found.

Political issues are “not yet weighing heavily on compliance decisions” for 85.2 percent of those polled by financial services communications firm IPC in its survey taken in March, entitled “The C-Suite and Compliance.” However, 9.8 percent viewed the potential regulatory changes as important enough to postpone key decisions for later in the year. Only 4.8 percent saw them significantly affecting decisions already made.

The response came from top level risk and compliance executives, with 81 percent holding C-level positions as chief compliance officers or chief legal counsels as well as chief risk, data, information and operations officers, and chief executive officers. The survey was compiled at the 2017 Securities Industry and Financial Markets Association Compliance and Legal Society Annual Conference on March 19-20, in San Diego.

The Trump administration took office in January with a flurry of activity aimed at peeling back the Dodd-Frank legislation of the prior administration. But delays and legal obstacles have so far stalled most of the initiatives.

Nearly seven years after the passage of Dodd-Frank, which resulted in an unprecedented roll out of regulations for financial firms, compliance executives say they are “supporting business goals” and continuing to implement regulatory requirements.

“Global financial services firms’ regional politics tend not to play as a large a role as one might expect,” explained Michael Speranza, IPC senior vice president, corporate strategy. What’s more, he said, “generally, the region having the most stringent regulatory requirements will guide how you do business globally.”

Speranza said that U.S. firms that fail to keep up with global requirements under the European Union’s MiFID II record-keeping obligations would ‘place a U.S. firm at a disadvantage ” if regulatory questions arise. “Trying to defend yourself without this data can be a tricky proposition,” he said. “Non-compliance can lead to millions of dollars in fines or reputational damage for companies not wise enough to take it seriously.”

The potential demands of regulators outside the United States are keeping firms wary of easing compliance, he said. It explains why compliance culture and conduct concerns remain the top issue for the group made up largely of chief compliance, risk, data, information and legal officers, with 89.3 percent calling a top concern. Understanding rules and regulations remained a high priority (87.3 percent), along with implementing new regulations (86.4 percent).

Nearly all of the firms increased investment in risk and compliance programs over the past year. Most of the firms (80 pecent) said spending had gone up 20 percent, another 5.9 percent spent 10 percent-to-20-percent more. Just 6.0 percent stayed at the same level.

By Robert Powell, Global Director of Compliance at IPC for bobsguide – first published March 29, 2017

With MiFID II implementation high on financial firms’ agenda, there is going to be a major change in the way that trading communications are recorded and stored. Both mobile and electronic trading communications have increased significantly over the last few years, which is reflected in the new rules that extend the scope of communication recording and surveillance to include all types of interactions, including text, IM, email, mobile, and social media. This is an ever-growing challenge for financial firms who must capture data from all their regulated users involved in pre-, during and post-trade activities and include communications from far beyond the trader’s turret.

Under MiFID II, records will also need to be retained for a period of five years, which will push firms to review and update their retention strategies. In the United States, the Commodities Futures Trading Commission’s (CFTC) rules require voice calls to be retained for one year while text communications are retained for five years.

One of the biggest change for businesses is that these new interactions are creating significantly greater volumes of data from disparate sources that must be retained and managed for potential regulatory requests and review. Unsurprisingly, most firms want to manage this data holistically as opposed to using a resource-intensive and siloed approach to each type of data source. It’s becoming increasingly important for firms to rely on a platform that stores and catalogues both e-communications and voice communications – seamless capture, archive and analytics through a convenient and cost-effective cloud-based system instead of one requiring more onsite infrastructure and people to manage.

Record retention and voice recording

With regards to voice recording, MiFID II stipulates that firms must conduct surveillance of key communications to ensure that they are compliant with market rules. In order for this to be effective, clever technology will need to be deployed; technology that can identify the context and impact of what is being spoken about, and can deliver insight into risks to ensure no wrongdoing is occurring.

Most financial markets records retention regulations also demand electronic communications and voice recordings be preserved, as far as possible, in their original form. This can be challenging when managing voice recordings should the quality of audio recordings not be good enough. Furthermore, voice recordings take up a lot of space so firms will need to ensure that they have adequate storage to hold this data. The good news is that the market is responding and newer communication devices are offering pristine audio for compliant call capture, retrieval and analytics to meet regulator requests.

Another challenge firms are facing is that many have legacy platforms that were built to meet the initial demand for WORM (write-once, read-many) storage at the advent of Dodd-Frank’s records-retention requirements. However, these systems are aging, and many are, or soon will be, end-of-support or end-of-life. Businesses are subsequently facing a costly hardware refresh and many are looking to outsource their archival.

Reducing risk holistically

As the European regulatory environment becomes more complex – and upcoming regulations such as General Data Protection Regulations (GDPR) will only add to the complexity – there is a growing need for a unified archiving platform for customers providing a single pane of glass into all of their communications. Increased regulatory requirements have also added several important reasons to automate the archiving process which should be heeded for customers to remain competitive. Firstly, customers must attest that records have not been altered at any point in the archiving process, and they must remain tamper-proof for the duration of their retention. Secondly, customers must have tighter control over enforcing their retention policies across all forms of communications, and further ensuring that they are not over-retaining data – something GDPR refers to – by having a defensible set of policies and procedures for deletion. Finally, when needed, customers must be able to quickly reproduce all communications leading up to a specific transaction or in a given time period.

The increasing breadth and complexity of record-keeping and record-delivery guidelines is pushing firms to find a way of holistically managing all communication data from the point of origination through capture, archive and transaction analysis. Indeed, this will be a competitive advantage for financial services firms that want to ensure that they comply with regulatory requirements, such as MiFID II, as efficiently as possible and improve their risk management capabilities.

With less than a year to go until MiFID II is enforced, firms need to be taking steps – if they aren’t already – to put tools and processes in place that will meet the new regulations around voice recordings and archiving. They should be focusing on finding means of capturing calls more efficiently and effectively, and implementing a unified archive that will guarantee the safe keeping and easy access of their data for the following five years. It’s crucial that businesses remain compliant without the risk of any misunderstandings – the repercussions of failing to do this are just too high.

By Brett Johnson for NJBiz – first published April 3, 2017. Photo by Aaron Houston.

Officials at IPC Systems Inc. see the company as being part of the evolution of industries such as banking, not at odds with it.

The Jersey City-based fintech company provides various communications services to the financial trading community — a collective of international banks, management and asset management firms, hedge funds and trade venues.

It’s a thriving market with a lot of attention from investors.

Michael Speranza, the company’s senior vice president of corporate strategy, mergers and acquisitions, and marketing, said the fintech industry has been accruing investment at a faster rate than almost any other industry.

Speranza couldn’t be more excited.

And his real hope is that the excitement about the fintech boom that he sees among traditional financial institutions is as strong as he thinks it is.

“A lot of these (institutions) don’t look at fintech as adversarial, they look at it and say — it’s coming, and my participation in it or not is going to be significant for my business downstream,” he said. “More so than ever, we’re seeing them willing to invest in these solutions, too, and seeing that it can benefit their business.”

On the other hand, David Frankil of the New Jersey Credit Union League isn’t as excited.

In fact, among the financial services firms, banks and credit unions he advocates for, fintech isn’t universally thought of as an ally, given that, for every complementary product that comes through the fintech pipeline, there’s an industry competitor in lockstep.

“It sort of depends on your perspective as to whether you see fintech as a threat or an opportunity or both,” Frankil said.

What-tech?

At the outset of any conversation about fintech is the question: What are we talking about?

Not shy to buzzwords, the tech industry in its convergence with the financial sector inspired a term that encompasses everything from digital mortgage lending company Quicken Loans to that impossible-to-understand blockchain payment network known as Bitcoin.

Don Musso of Gladstone-based FinPro said there’s a tendency to throw everything into the area of fintech. But, he said, fintech generally is defined by the application of technologies to the broad financial services sector.

Still, it’s difficult to capture all that fintech can mean, said David Frankil, CEO of the New Jersey Credit Union League.

“What some refer to as emerging fintech companies probably would not have been put in category of financial services companies at all, except that they have big implications on those companies,” Frankil said. “You’re not going to see any of that in Merriam-Webster.”

 

John McWeeney, the CEO and president of the New Jersey Bankers Association, sees fintech companies as both an ally and an adversary.

McWeeney pointed to Mirador, an Oregon fintech outfit that creates automated online small business lending platforms for community banks, as a success story.

NJBankers was one of the industry associations Mirador contacted to spread the word about its services. The organization now refers small banks that don’t have the capabilities to build a digital lending platform alone to Mirador.

On the other hand, McWeeney keeps a wary eye on the rise of another fintech company, Kabbage Inc., a growing Georgia-based firm that bypasses banks altogether and provides funding directly to small businesses.

McWeeney said the impact of competitive fintech firms isn’t dealing a significant blow to the industry, at least not yet.

“But I think, over time, banks need to be more aware of this and have a strategic plan on how they’ll respond,” he said. “Especially with millennials, they’re drawn to doing things this way — solely through technology. So, it’s a whole generation of customers that risks being handed over to these providers.”

It’s the same attitude that financial institutions take to just about any technology, given that it’s not just fintech that’s disrupting the industry.

Frankil spoke to the impact of popular ride-sharing apps, such as Uber and Lyft, on lending.

Loans for taxi medallions, those small metal shields fastened to the hoods of taxi cabs, which credit unions have historically been strong providers of, are becoming bad deals, Frankil said.

“All of a sudden, those taxi medallion loans aren’t worth today what they were yesterday,” he said. “So, you’ve got these credit unions that hold the loans having to write them down because folks that own them either can’t make payments or are having difficulty doing so.”

A generation of renters

In its entrance into the New Jersey market, Unison Home Ownership Investors is hoping to address the challenges facing millennials who want to buy their first home.

Across the nation, this demographic has trailed previous generations in homeownership, according to Jim Riccitelli, a co-CEO of Unison.

“So they’re renting, even if those rents rates are astronomical,” Riccitelli said. “And the more rent you pay, the harder it is to come up with that down payment. So, you end up chasing your tail in a way. It’s a big problem.”

According to a survey from another fintech firm, LendingTree, Pittsburgh has the most millennials looking to buy a home in the company’s marketplace, with 48.4 percent of all mortgage requests coming from millennials.

Washington, D.C., was a close second by that measure, at 46.8 percent. No Garden State city found a place in its rankings.

 

Like any new tech-based business model, there is some question of how fintech ultimately will sit with regulators.

“Regulatory regimes have usually wagged new technology developments, that’s true for almost any industry,” Frankil said. “Maybe it takes a scandal or two to bring that attention to fintech, a headline-grabbing issue that drives demand for regulation.”

Just as financial institutions have mixed feelings about what the fintech boom will bring, Don Musso, CEO and president of bank consulting firm FinPro Inc., said there’s no agreement on how fintech firms should be supervised or regulated.

Or if they should be at all.

“Most banks aren’t demanding it,” Musso said. “It’s a 50/50 battle over whether they should have that scrutiny or not. But if it ever becomes a big enough threat to banks’ survival, you can bet there will be demands for oversight.”

Musso added that it’s a conversation that already is happening.

In December, the Office of the Comptroller of the Currency issued a paper announcing a proposal to create a special purpose national bank charter available to fintech companies.

While not all fintech firms offer bank-like services, some do have non-deposit products that have attracted attention.
Venmo, for example, is a fintech firm that has taken the peer-to-peer transaction market by storm, and is set to quickly overtake any bank service of this sort in terms of volume.

“There’s no magic to it,” Musso said. “It exchanges money from one FDIC-insured account to another. But it does it quickly, easily and it’s user friendly. There’s no doubt tech like this is going to change the delivery method of banks.”

 

Fintech firms also are slowly entering the residential mortgage space.

This is an area of business some banks are nervous about new players encroaching in. But, again, it’s not universally the case that fintech firms are courting bank customers in this area.

Unison Home Ownership Investors, for instance, would argue it’s the best thing for banks. Unison said its products — which can provide half of the down payment for a mortgage in exchange for a chunk of the potential increase in value on the home — only up the potential pool of home buyers.

Jim Riccitelli, one of the company’s co-CEOs, said this could be good for everyone.

“This is highly complementary to the lender,” Riccitelli said. “They’re dealing with challenges on a daily basis in helping their clients get qualified for a mortgage loan. We can come into the picture and enable more clients to qualify.”

Riccitelli said that’s important in a time of tightened mortgage-lending standards and soaring home prices. The California-based company offers its service in New Jersey, among a handful of other states. Riccitelli said Unison selected the Garden State as one of its markets due, in part, to the region’s high home prices.

Thomas Sponholtz, the company’s chairman and its other co-CEO, said their firm’s service allows people more flexibility in getting the home they want. It’s something that didn’t exist in this form before Unison, he said.

“This is true innovation, whereas most of what’s called that is focused on a different way to distribute the mortgage and make it easier to get a loan — a lot of fintech is focusing on that,” Sponholtz said. “And those firms are stealing market share from banks. It’s not what we’re doing … but there’s nothing wrong with (it).”

Prime among those competitive forces is the mortgage lender Quicken Loans and its Rocket Mortgage program.

With a segment of fintech firms looking to take market share away from financial institutions, some industry experts are taking a pragmatic view.

“(These companies) are making inroads; there’s no doubt there’s competition there,” Musso said. “The best thing about it is that it’s forcing banks to re-evaluate all of the processes to get products to customers quicker, faster and cheaper. It’s a good, competitive kick in the butt.”

By Robert Powell, Global Director of Compliance at IPC for Fund Technology – first published April 2017

With the Markets in Financial Instruments Directive (Mifid II) deadline extended to January 3, 2018, European firms are now at various stages of readiness, with most on schedule to be compliant with the new rules when, or soon after, they go into effect.

Although Mifid II is an ostensibly EU-based directive, financial firms in other regions that trade with European counterparties are held accountable by European regulators to remain compliant with some of the new rules.  An example of this is in the communications retention space where, despite Mifid II bringing greater parity in retention periods, U.S. firms may lack compliance in several areas.

The Commodity Futures Trading Commission, like Mifid II, requires telephone calls – land line and mobile – to be captured and retained for five years in Europe and one year in the U.S.  Retention periods, media types and the use of policy to prevent certain behaviour are all treated differently by European regulators than by their U.S. counterparts.

The table below outlines some of the differences in requirements between the new Mifid II rules and the current U.S. equivalent rules.

For a long time in the U.S. policy has been employed in conjunction with attestation, which is not widely used in Europe where policies are typically required to be tested as being effective. In the telecommunications space, it is particularly hard to test rules where “bring your own device” policies are in place without running into privacy issues if you ask an employee to divulge details of personal calls placed on personal devices an employer has no right to inspect. But MiFID II dictates that firms must take reasonable steps to prevent the use of personal devices that cannot be recorded. The regulatory pull and the privacy rights of an employee will make this almost impossible to enforce through policy.

Firms that deal with European counterparties or clients will be expected by regulators to be compliant with the new rules to participate in the market.  That will include how you handle research and record retention.

What is the risk for U.S. firms that aren’t preparing for Mifid II?  A U.S. firm could be asked by a European regulator to produce records and be required to explain its actions in the European marketplace but because without consistently recorded communications, they will be unable to produce defence records.  With the new rules, the European regulators may have more data than the firms they are questioning, as the call will almost certainly have been recorded by the European firm as part of their MiFID II record-keeping obligations. This may place a U.S. firm at a disadvantage.  Trying to defend yourself without this data may prove difficult.

One of the easier ways to mitigate risk in this new era of greater global regulation is to adopt a zero-tolerance compliance culture.  That means any employee who violates company policy is subject to termination. It begins with training that is constant, audited and evolves as the organization matures in its compliance culture. Before adopting this kind of environment it is important to clearly communicate your firm’s rules and requirements. Working closely with compliance, legal and human resources, a firm should conduct a thorough audit of internal policies to ensure they are aligned with a zero tolerance Innovation and adoption of new technology should be continually verified to be in line with the organization’s rules.  Technology can provide greater efficiency and understanding for improving processes while also used for zero-evidence application.

Non-compliance can mean millions of dollars in fines for companies not wise enough to take it seriously.

By Tim Carmody VP, Network Product and Engineering at IPC for e-Forex Magazine – first published March 2017

Connectivity is critical for capital market participants – but that’s nothing new. The financial markets industry has been talking about the importance of connectivity for data and voice communications for quite some time. What is new is that financial firms worldwide are increasingly being encouraged to address their communications not only to meet upcoming regulations, such as MiFID II, but also to adopt new paradigms, and get closer to clients, so that they can source liquidity more easily.

COMMUNICATION CHALLENGES

Given today’s volatile markets, investment managers and brokers are continually faced with a number of complex trading challenges. Indeed, financial organisations are under growing pressure to support collaboration across the enterprise, seamlessly share corporate resources and applications, enable best trade execution and securely connect all of their multiple locations around the globe. Conquering these challenges is essential for firms needing to remain competitive, however, cost, a lack of resources and performance issues can often stand in the way.

To connect multiple office locations and distributed services firms must ensure they have a private and secure infrastructure that enables mission-critical enterprise connectivity for data, voice and video applications. More and more institutions are migrating their on-premise solutions to cloud-based models. Scalable and adaptable, the cloud has the advantage of being able to power new workfl ows, meet stricter regulatory and security requirements, and provide the fl exibility needed to integrate new innovations and applications when necessary. To do so, cloud-based services and distributed trading execution, embedded at liquidity centers, require coherent, secure connectivity.

CLOCK SYNCHRONISATION AND TIME-KEEPING

Ensuring accurate and secure clock synchronisation and time-stamping is also a major challenge for financial firms. Indeed, with the regulatory environment becoming increasingly stringent, the need for pre- and post-trade transparency is growing with each passing year. Any firm that trades in the United States or European Union needs reliable, synchronised clock feeds to connect to their trading applications and order management systems.

Time precision and stamping are at the heart of regulatory compliance with MiFID II RTS-25 and FINRA Rule 4590, placing strict requirements on the granularity of timestamps and the maximum divergences of clocks that are being read. Clock synchronisation subsequently plays a critical role in investor protection by being a mechanism that further supports fair, safe, efficient, and transparent markets.

In addition to electronic trading compliance, firms relying on voice trading also need to remain compliant by guaranteeing their voice systems record legacy T1s and E1s through reliable clocking to avoid a degraded service and enable regulatory monitoring of trading activity.

DRIVING BUSINESS GROWTH

All financial firms have their complexities; however, their networks shouldn’t be one of them. It is important that firms ensure they are able to embed services closer to liquidity venues and market participants, whether co-located or across a wider community. Another industry trend is SaaS and Cloud-based models fast becoming the norm within the financial markets community. As such, market participants need high precision, synchronised and traceable time feeds across different technologies and across global markets.

IPC is an expert in helping the financial community interact and proactively address market challenges, ensuring firms remain connected and compliant. The company offers one of the largest Financial Markets Network portfolio, connecting global financial centres and allowing access to more than 6,000 market participant locations across 700 cities in more than 60 countries. The portfolio includes data connectivity solutions consisting of the Connexus Extranet, Connexus Ethernet and Connexus WAN, as well as voice solutions consisting of Connexus Voice and Trader Voice services.

The company’s Connexus Infrastructure Services (CIS), a managed private and hybrid Infrastructure as a Service (IaaS), enables financial firms to execute a variety of electronic trading strategies and embed services closer to liquidity venues and market participants, whether co-located or across a wide community.

IPC also recently launched Connexus Chrono, a turnkey clock synchronisation and time stamping service engineered to deliver high precision, synchronised and traceable time feeds to global financial market participants. The service can be delivered in a variety of different levels of accuracy ranging from 1 microsecond to 250 microseconds, and is delivered worldwide.