The way we communicate has changed. The landline phone call is almost a thing of the past; mobile and electronic communication has played a large role. Regulators have recognized this and have told regulated firms they need to record all forms of communication, traditional and modern.
New regulations around recorded trading information impress upon market participants the need to have instant access to all forms of communication around a specific trade to supply the regulator when asked.
Deadlines for Compliance
The crisis in 2008 left international financial markets devastated and the U.S. government reeling in shock from the extent of the bailout it was forced to provide. Greater protection to consumers and American taxpayers came in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Much of the Act’s 848 pages created new authorities and capabilities to ensure financial stability. Its raison d'être is to avoid another financial crisis and minimize risks to U.S. tax payers and the global economy.
Whilst the main part of the Act is concerned with regulating the swaps market, a section stipulates the recording of all trade-related communications by traders active in the swaps market trading with, or in, the US. March 2012 was the first of several significant dates for those concerned with recording. Investment Advisors with more than 15 U.S. citizens as customers were required to register with the Securities and Exchange Commission (SEC). By March 2013, companies had to comply with the call recording legislation for both fixed line and mobile for their swaps transactions.
In the future the Commodity Futures Trading Commission (CFTC) will request the electronic records that relate to a transaction rather than specific message types or those of a named custodian. If a firm used Twitter to communicate about the transaction then they will have to provide these records without being specifically asked for their tweets. Firms are now responsible for knowing all communication methods across transactions and retrieving them in a way that allows the ‘reconstruction’ of the communication, both pre- and post-trade.
Suggestions that emails, Bloomberg messages and phone conversations would have to be tagged with the transaction ID were initially considered. But following CFTC clarification in January 2013, the industry worked with leading vendors to formulate workflows which enable a regulated firm to recover communications with a particular counterparty and then to narrow the scope to a particular trade.
U.S. regulators issued guidance regarding instant messaging and social media several years ago, and regulated European and Asian firms may have to tighten policies on permitted communication methods to ensure all relevant records are captured. Public instant messaging, Skype and proprietary messaging platforms are likely to decline in this space due to the difficulties of maintaining a “complete and accurate record” as firms must now record all media used for business communications.
Storing and retrieving data
In the US, mobile recording has not been the norm. Systems have not been designed to cope with the massive increase in volume that tracking mobile and voice in conjunction with email conversations will bring.
Expectations are that global regulators will apply the discretion granted to them under their requirements when requesting record keepers to produce communications. The CFTC published its final rule in November 2012, in which it reiterated its continued support for flexibility or ‘discretion’ in likely recognition that recovering electronically stored data among such vast quantities is challenging for firms.
However, CFTC requests should be prioritized and responded to immediately to reflect their importance and urgency. Retention periods have also been widely discussed and adding fixed line and mobile calls to requirements raised concerns around the volume of data requiring storage. The final rule stipulates that recordings must be retained for just one year, which will allow the industry to gradually adjust their approach to records retention, search, and speech analysis technology.
The ability to search for keywords and phrases has been an integral part of the compliance officer’s monitoring and retrieval process; regular searching of users’ email, Bloomberg and other text-based messages is now commoditised and forms part of almost all retention platforms. Still, the ability to search for keywords in voice recordings and integrate them within the life-cycle of a specific trade is a challenge that compliance officers are about to face. How does a tool adjust or allow for context?
[Do Regulation and Customer Service Go Hand in Hand?]
Banks are now starting to deploy systems to help meet the challenges of increased retention and retrieval. A correctly deployed and targeted system is able to increase productivity and reduce false positives for the monitoring and retrieval of messages. It must be sufficiently flexible to meet the as yet unknown challenges of other regulations as they filter down including the Markets in Financial Instruments Directive (MiFID II) and Market Abuse Directive II (MAD II).
Responsibility shifts to the regulated
Today’s new environment shows a marked shift of responsibility from the regulator to the regulated. Until now the onus for understanding communications media used in the negotiation of each transaction was firmly with the authorities, with requests often media specific and targeting individuals rather than transactions.
The Dodd-Frank Act, and the interpretation of the ‘intention’ of the rules by the CFTC, means firms must now produce communication records relating to specific transactions, and in the future the industry should expect to see requests which target individual trades. Making sure systems are flexible enough to handle these requests is one of the steps towards banks safeguarding themselves against a repeat of the 2008 crisis.
Robert Powell joined Etrali Trading Solutions in October 2012. With over 20 years of experience in the financial markets and the last ten years focused on records retention and investigations, his focus is to bring best practice and compliance workflows to Etrali Trading Solutions' global customer base. He has significant experience in managing huge archives and in creating industry leading processes and products to help Compliance teams meet the ongoing challenges of new regulations. Prior to joining Etrali Trading Solutions Robert was the Director of Compliance at Global Relay Communications Inc. and worked at Bloomberg L.P. as the Global Product Manager for Compliance products.