Compliance

07:00 PM
Neil Gray
Neil Gray
Commentary
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Flip Sides of the Same Coin: Compliance & Transparency

The upheaval caused by the 2008 financial crisis continues to ripple outward, creating an unsettled environment that has disrupted traditional measures of trust.

Trading ultimately has always been based on trust, especially once money or coins were introduced. Originally, coins would be made of specific metals and would weigh a specific amount. People trusted the coins. Unfortunately, the less scrupulous took advantage of that trust to enrich themselves using counterfeit coins made with base metals. Such shenanigans destroyed public trust and brought about the fall of empires. Is it any surprise that compliance and transparency would become crucial in the connected global economy of today when its lack in the early days could cause such devastation?

While much has evolved over time, the foundations of the markets remain much the same.  In order for firms to do business, they must follow the rules as set out by various agencies around the world. In turn, conversations and transactions amongst market participants need to convey trust, creating an atmosphere where participants feel they can confidently trade. However, the upheaval caused by the 2008 financial crisis continues to ripple outward, creating an unsettled environment that has disrupted traditional measures of trust. The very act of being in the markets is actually changing the very dynamics of what's happening and how things get executed from exchanges to alternate trading systems and beyond.

The techniques, technology, and culture used by market participants needs to evolve and convey trust. However, the same instability that is creating the need to evolve makes it difficult to determine how those tools and standards should evolve. What used to be adequate in the past has been deemed insufficient, leaving firms scrambling to determine how they can best obey all the rules while not being stuck with a poor return on investment due to overdoing it, and stiff fines from underdoing it. The only certainty is that firms must comply and operate in a matter that is open, communicative, and holds others accountable (transparency). Compliance and transparency are flip sides of the same coin, the coin that drives the markets: trust.

Boards, and ultimately individuals, now must report their level of compliance in exactly the same way all institutions report their financial status, by audit. Unfortunately, this is easier said than done. For complete transparency, a 24/7 record across all voice and data channels and for all transactions will need to be created. Market participants and service providers are obliged to understand the sentiments and the facts, and to know whether transactions are right and permissible. This means that the relevant parties have to be identifiable, that conversations need to be capable of being placed on a timeline, and that tone and pitch and basic flow have to be recognizable. This leaves the market and the regulators going through a process of determining "what's good enough?"

This process is further complicated by differences in regulatory demands across the world. While these demands all broadly aim for greater transparency and accountability, what they require varies. In the UK, the FCA directive is for fixed line voice recording include all electronic communications to and from mobile devices concerned with receiving and executing client orders or transactions. 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 swap trade be made available and presented. Information must be recorded in a suitable format so that it can be reviewed to confirm that traders took appropriate action at the appropriate time.

From here on out, there is effectively a requirement to be compliant and accountable, to understand company process and risk. An important question to ask when working to become compliant is "Are you thinking about this in the right way?" As regulator impact worldwide will extend even further, acting now would remove headaches later. The threats of record fines and personal liability lend additional motivation to comply, but until companies are asked to demonstrate that their infrastructure or processes are compliant, they cannot be certain that any particular solution used will suffice. The systems put in place need to be dynamic and flexible enough to change and adapt to unforeseen circumstances in the future.

Underlying all this is the need within the markets to communicate in order to drive relationships, trust, and liquidity. Firms need to install systems from the get go that allow efficient communications and enable oversight, dynamic rules, and red flags when appropriate. They need to be able to secure, record, and archive all communications to analyze both in real-time in the future to convey honesty, transparency, and oversight.

The systems needed to accomplish all of these things would need to be rules orientated, adaptable to change and regional demands. Agility and flexibility would be critical, as would delivery by experienced teams who understand the needs and drivers of the financial trading markets. Fortunately, products with those traits exist to help firms meet requirements. By working closely with industry-savvy technology providers, firms can implement processes, systems and best practices that result in the improved reputations, trust and transparency crucial for all players in the market. Operating in any other way might imply there is something to hide.

Neil Gray is the Vice President of Product Marketing, having re-joined IPC in 2013.  Historically, Neil worked for IPC a decade ago as the VP of Product Management post the acquisition of Purple Voice a software based Global Hoot and Intercom solution, which Neil ... View Full Bio
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