When Standard Chartered announced in its end of year results that it will include a $900 million provision for penalties relating to investigations into FX trading issues, trading compliance was once again thrust firmly into the spotlight.
From electronic chat rooms to email, video calls to phone calls, there has been a constant fight by banking regulators around the world to have effective oversight of the communications channels and so clamp down on unscrupulous traders set on cheating the
But let’s be clear – this isn’t just about stopping the tiny minority who are committing fraud, it’s about creating a level playing field where all parties are protected, where trading transparency is paramount, and where a single record of truth is created
should there be any confusion or dispute over the intricacies of a trade further down the road.
In the world of fixed income, commodities and currency (FICC) trades, voice trading remains paramount. These highly complex financial instruments are far from straight forward vanilla; they require long and detailed negotiation and definition. In short,
they need explaining.
The final contractual element of the financial instrument is clearly important. But so is all the preamble to the trade. Where small print in contracts can be argued over, it is critical that every step of the process that went into creating the trade is
MiFID II requires comprehensive and evidence-proof recording and archiving of all communications relating to a trade. In practice this means that every bank must record all calls which will/may result in transactions, notify the customer that the conversation
is being recorded, store all these recordings for a minimum of five years, and then finally be able to quickly retrieve upon request from the regulator all communications leading up to a specific transaction or in a given time period.
Put simply, if a trade needs explaining, it needs recording. What’s more – and on this MiFID II is clear – you cannot trade if you cannot record the trade.
Large players in FICC trading have trading volumes in the billions of dollars per year, meaning every minute a system is shutdown translates to substantial losses. A malfunction of the recording system will quite literally silence a trading floor, costing
a bank in excess of $9 million per hour in lost revenue (see my earlier blog on this topic).
So what reasonable steps can a bank take to ensure their voice recording systems are functioning properly, and so keep their traders trading?
As the Head of Global IT Compliance at a Top 10 Global Investment Bank put it: “MiFID II will require all ‘communications that are intended to lead to a transaction’ to be recorded, so solid compliance monitoring and system health checks are key to early
identification of potential risks, non-compliance trends and recording failures.”
However, for many banks the solution until now has been all testing of the voice trading systems to be done over the weekend, with the Ops team having to quite literally walk the floor to validate the functionality of every Turret on the floor. But there’s
a problem with this. The ops team can make calls to check the endpoints are working and – if they are lucky – they’ll have sufficient time to also check whether a few of these calls were recorded. Still, this does not mean that recording will be functional
every day following that weekend. Any change in the network or provisioning of the product could lead to lose of recording.
Just because the proverbial ‘red light’ is flashing on the call recording system, it does not automatically follow that the system itself is recording properly. You can’t record silence; you need to record live traffic.
To ensure compliance, testing must be done daily and cover every Turret on the trading floor. Periodic sampling can no longer be seen as a ‘every reasonable effort’ by the regulator, and leaves the bank exposed to significant compliance risk.
This daily testing of live systems would be a time-consuming and costly operation – were it not for automation.
Augmenting and enhancing the testing of these high-leverage systems can dramatically mitigate risk and reduce the cost while increasing the coverage of testing. Automated and proactive testing every night mean that issues are identified before they impact
a trader and the bank’s senior management are kept fully informed together with the steps that are being taken to quickly correct the issues.
This gives the bank peace of mind – knowing it has the data to quantify the outages to the regulators, and therefore, assist in avoiding any costly investigations and mitigating greatly the risk of potential fines for non-compliance.