Compliance

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Mitchel Kraskin
Mitchel Kraskin
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The Dawn of High-Frequency Compliance: Will You Win the White-Hat Arms Race?

Don't look now: The SEC is actively increasing IT spend and quant recruitment to enhance forensics in financial management systems. The implications for the financial services industry are enormous.

With all the buzz about high-frequency trading, shouldn’t we be thinking about high-frequency compliance, or what I’ll call HFC?  It is time for another paradigm shift in the compliance world.

Instead of worrying only about the “bad guys,” we now also have to be worried about the “good guys” -- the regulators. Scant attention is being paid to keeping up with the growing sophistication of regulators’ technology tools. We should not underestimate the risk to the franchise from a newly empowered enforcement layer whose goal is to identify and shut down rogue activity in the financial marketplace. A real-time, high-frequency compliance system is needed in order to keep up with the advances being made by regulatory agencies. Regulators and those they regulate are in a compliance technology arms race.

Not long ago, the SEC and others reached a fundamentally critical tipping point -- realizing that no matter how much headcount deployed, they could not effectively process the information necessary to supervise the markets in general and the participants specifically. Too many players with too many complex products moving at the speed of, well, fiber optics, are resulting in a change in the regulatory hiring roadmap for both enforcement and supervisory functions. One trend that is emerging is that quantitative analysts (quants) are no longer being recruited just by hedge funds. They are also actively joining enforcement agencies. Requisite budget allocation, particularly IT spend, is also changing.

As the SEC itself states:

...the SEC has taken significant steps to enhance its technological capabilities and modernize its computer system. This includes deploying a centralized database for the thousands of tips and complaints it receives, installing a new automated work-flow system to track and triage enforcement actions, creating a new automated e-discovery system to help investigators rapidly review evidence, setting up a national standardized collection and storage system for SEC inspections and examinations, developing and procuring a unique system to analyze market data, and refurbishing its financial management system. By leveraging modern, reliable, and innovative technologies and predictive analytics, the SEC is transforming the way it performs its mission…

The implications are enormous for the financial services industry. Those who choose to ignore the forensic wave will be hard pressed to avoid the bright lights shining over all of their transactions and activities. Indeed, the tools initially sold to financial services to support operational activities such as trading, settlement, portfolio accounting, etc., have created a huge repository of data that can be mined, thus uncovering the buried bones of past transactions.

The question of how to best prepare for HFC is yet to be fully answered, but understanding what is being added to the regulatory tech arsenal is a good place to start. From there, forecasting the costs and weighing the benefits of deploying internal HFC controls are important agenda items for the governance, risk management and compliance (GRC) committees, and boards of today’s financial services firms.  We know the regulators have done this analysis, and we know what they’ve decided. 

Mitchel Kraskin is co-founder and CEO of Compliance Science, Inc. ("CSI") which has developed several groundbreaking governance, risk management and compliance solutions. With over twenty five years of executive experience managing the creation and delivery of software-based ... View Full Bio
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Becca L
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Becca L,
User Rank: Author
6/30/2014 | 1:19:08 AM
Keeping your head down is no longer an option
Great article, Mitchel, it definitely sends shivers down a few spines.

There are sayings along the lines of, if you're not doing anything wrong, you don't need to worry about the authorities. But as you put it, the implications are "enormous" for the industry. It looks like many firms will have some tidying up to do! Old records and old unstructured data are increasingly subject to regulatory oversight, even if the firm itself hasn't found ways to integrate that information into their systems!
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