Compliance

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John Sabatini and George Smirnoff
John Sabatini and George Smirnoff
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Trade Reporting, Surveillance Key To Compliance

With increased regulatory focus on protecting securities market participants, trade reporting and trade surveillance are key to providing transparency, efficiency and oversight for today's trading environment.

What's at Stake?

To survive in this dynamic marketplace, firms need to become more efficient by stepping up the pace on regulatory reporting compliance integration in their smart routing and algorithmic trading systems and enhancing processes for monitoring trader activities. Having the best trading relationships no longer will be sufficient; rather, firms will need to have robust systems and controls required for compliance. Whether compliance means Reg NMS and the best execution price, OATS and data quality, or monitoring processes around fraud, firms must develop processes and systems that ensure fair trading at an acceptable cost.

As regulators step up their efforts to guard against fraud and other illicit activities, the fines for noncompliance also have increased. Violations of trade reporting rules and fraud via trader manipulation can result in multimillion-dollar fines and sanctions, potentially tarnishing a firm's reputation.

Historically, firms addressed remediation of trade reporting and trade surveillance problems through a review of supervisory procedures and other monitoring controls. In today's dynamic trading environment, firms must fully understand the complex regulations and perform an analysis of their business processes and supporting technologies to understand where compliance gaps exist. With this information, they should develop a strategy for linking together business processes and data analytics for effective trade reporting and surveillance.

The first step is for the business process team -- typically business analysts within the risk management area -- to develop current-state trade process flow diagrams and to overlay specific data and other reporting requirements. The team then can perform a risk and control assessment to identify gaps in processing procedures, the systems environment, and supervisory policies and procedures.

Subsequently, the data analytics team creates a data map to source how information is captured or derived for required reporting and surveillance; develops test scripts -- data-extraction queries based on the reporting requirements -- to validate that trade order events from each system are properly extracted and identified; and performs a gap analysis between the output of the scripts and the output of actual compliance reports to identify reporting issues.

The final step requires a highly integrated and iterative approach to determining the root cause of issues that arise during analysis. The data analytics and business process teams must act in an integrated fashion in order to uncover the root cause of issues and determine the best business solution. Representatives from IT, application development, operations, risk and compliance functions are often needed because of the high complexity involved in trading activities.

By continually examining the accuracy of trade report data, securities firms, exchanges and ECNs can challenge assumptions that may have been made when the reporting and surveillance systems were implemented. Knowledge of the current processing environment and data reporting requirements can be used to strengthen business processes to better meet growing compliance demands. In this manner, firms can proactively address their trade reporting concerns and stay ahead of the compliance curve.

Contributions to this article were provided by Keith Pajonas and Amy Gennarini of Ernst & Young.

John Sabatini, +1 212 773-0619, john.sabatini@ey.com, and George Smirnoff are senior managers in Ernst & Young LLP's Financial Services Office, based in New York, N.Y.

John serves as the Technology Enablement service line leader for compliance initiatives, specializing in the areas of anti-money laundering, trade compliance, trade surveillance, electronic messaging, and data retention. John has an MBA in strategy and finance and a second MBA in accounting. He is also a certified information systems auditor.

Note: George Smirnoff has since left Ernst & Young and has joined Trexin Consulting LLC as managing director, 917-720-7448, george.smirnoff@trexin.com.

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