Compliance

09:59 AM
Magnus Almqvist, SunGard
Magnus Almqvist, SunGard
Commentary
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Surveillance and Monitoring Through the Looking Glass

Looking ahead to 2013, European regulations are stepping up the need for automated surveillance and monitoring solutions on the buy side, writes SunGard Protegent's, Magnus Almqvist, who says firms must have audit trails and quick answers to questions on suitability and personal dealing.

The European Securities and Markets Authority (ESMA) guidelines on automated trading – dictate that anyone using and/or providing direct market access (DMA) needs automated controls and surveillance in place. This, coupled with the buy side’s increased interest in execution, has resulted in the buy side looking at more sophisticated, and in some cases automated, surveillance and monitoring solutions. Spot checks will not be adequate to meet regulator expectations in 2013.

Following ESMA’s increased activity and determination to implement uniform interpretation of regulation and enforcement in the region, regulators are stepping up the game with active surveillance of the markets in their jurisdiction and much closer cooperation with their peers across jurisdictional borders. This follows the requirement for better tools, knowledge building, and more actively engaging with the market actors.

A prime example of this is the Irish Central Bank, which in cooperation with the Irish Stock Exchange, is unwinding delegation arrangements relating to market abuse oversight previously in place. The result of this trend is that trading venues and the buy and sell side are faced with more complex and detailed questions. Indeed, the expectations from competent authorities that actors now can respond swiftly with details and information is putting further pressure on firms to have their data in order and the capacity to perform advanced analytics on events that occurred years back.

In the wake of (i) the UK payment protection insurance mis-selling bill passing £10b, (ii) miss-sold complex swaps putting small-cap firms in dire financial situations, and (iii) the new ESMA guidelines on MiFID suitability requirements (2012/387), we are seeing record keeping and auditing capabilities on customer on-boarding and sales practice review stepping up. Brokers and asset managers alike now need systems in place that flag potential miss-selling and provide clear audit trails of all advice given and the associated suitability checks done in relation to that advice.

In terms of social media surveillance: what is communicated via Twitter and Facebook? Will the sell side and asset managers start using Twitter as a means to keep their clients up to date and provide news updates? If so, how can they prove that they can keep these fast-moving and far-reaching information media under control, as well as detect and act on any potential information leakage? These changes are already in full swing as we head into 2013. With this follows the need for the appropriate systems and checks to be in place coupled with the ability to show audit trails and actions taken on any potential irregularities.

With the U.S. regulators extending their reach, there is an increased focus on personal dealing and diligent pre-approval processes. Is a firm’s staff acting on firm advice ahead of them making this advice public, or ahead of news and client activity? Does the firm have the tools and means to monitor staff dealing and are they sure they are disclosing information diligently and in a timely manner? It all comes together at the compliance function within the firm. Increasingly, demonstrating a well-functioning compliance function is an assurance brokers and asset managers are expected to give to their customers, who are becoming increasingly advanced and ask very pertinent and probing questions before signing over their business.

In order to achieve this, an integrated solution that can monitor alerts and manage cases with information combined from all areas is required and expected, at least by competent authorities. Perhaps a slight slip of the tongue on a Facebook post can be viewed as harmless in isolation. But if a firm’s system helps the organization see the combined pattern of that post, a client order and a staff member taking a position, they can start to see a pattern where they initially want to review the sales advice given to that client before the order was placed and then form an opinion to take action or not.

Systems of today will support compliance officers to see these combinations, easily and quickly manage flagged irregularities and then manage cases that span areas of compliance that historically were managed in isolation. That level of integration and seamless compliance and risk management will be the expected norm in the near future, and actors will need to be prepared for this reality in 2013.

—Magnus Almqvist is senior product specialist for SunGard’s Protegent.

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