Investment banks are agreed that they have to do something about trade reconstruction – but where do you start?
Even as the latest regulatory framework crystalizes, we know that future demands will be tougher, as will the penalties that accompany them. When banks invite me to discuss their trade reconstruction compliance issues I am surprised by the variety of problems and by their severity. In this short blog, I share some of my thought processes around the subject to help inform your decision making.
JP Reis set up Unified Compliance to tackle regulatory issues around data capture and extraction on the trading floor. We knew there was a time bomb ticking for the firms who had decided that voice recording compliance meant just that i.e. VR was an end in itself. For these organizations, there was negligible consideration of future playback or analysis, especially not in bulk. Either that or budget restraints meant that the gamble looked worthwhile. Our high-level consultations have seen this root cause present a range of serious symptoms, here are 3 generic examples:
- The regulator wants to see 7 years’ call data for a trading team but it’s stored on DAT;
- The regulator wants all call data relating to LIBOR over a fixed period but none of the data is tagged;
- The required data is stored on a modern format and well tagged but there is no process or headcount to extract it.
Bulk data extraction is retrospective but if you have issues here then it’s your first priority. The data can be requested by regulators or fraud officers either to investigate a specific anomaly or to see if your bank is compliant in terms of the ability to access this data. Assessing the current situation and scoping the project is the first step.
Extracting data from legacy formats can be a huge task without the appropriate tools and experience. Recorded data in its rawest form takes as long to extract as it did to capture unless the appropriate technology is applied. Even then it can be onerous. If you decide you need to bring in help, make sure that the vendor is experienced on the trading floor, has expertise with financial voice recording and has the ability to work with multiple stakeholders across Trading, IT, Compliance and Legal.
Many of the problems around compliance are driven by a lack of process. I’ve been telling companies for years that if their organizational systems aren’t robust and enforced then no amount of technology will assure compliance. Flipping that around, there is no value in imposing technology that hinders business as usual. Integrated processes must be designed to make data capture painless and ensure interrogation is as simple as possible.
Of course, trade reconstruction is about more than voice recording, there is e-mail, SMS, IM, video conferencing, even social media. The list will grow. This means that your process design can’t revolve exclusively around voice recording technology, it needs to be more holistic. When it comes to extracting data you want to be using a single tool – this means that metadata must be homogenized at capture. Data also needs to be tagged with as much detail as practically possible so that it becomes more easily searchable later. Even the latest data capture techniques can be undermined by poor tagging.
Future Compliance Requirements
I don’t need to tell technology strategists to plan for the future but I sometimes need to apply a reality check on the future they have in mind. The likely scenario sees a wider scope of media being pulled into the trade reconstruction mix, in a more international context with much shorter delivery requirements. The firms who are facing emergency remediation of legacy data issues now are probably wishing they had planned for a more realistic view of the future 5 years ago. The short-term demands of the balance sheet can stop this happening but in the medium-term the smart money is on getting the roadmap right.
Voice recognition technology is the key to a compliant future. It can help with legacy data interrogation now, the associated methodology should be built into new processes and most importantly, it must be factored into your infrastructure strategy. The trading floor is a multi-lingual, jargon-riddled environment with lots of background noise. You need a system that can handle that. Its development will be iterative and it will need to evolve as language does but the sooner you start working towards this, the sooner you start reaping rewards; remember, what the regulators are seeking is effectively business intelligence, what bank wouldn’t want that insight on its own organization? As your solution becomes more powerful and intuitive it will become capable of real-time alerts about positive and negative issues, at which point your trading operation becomes more powerful, compliance becomes a minor part of business as usual and the fire-fighting cycle that we see now is broken.
Future directives from Dodd-Frank, the FCA and MiFiD could be looking for real-time controls in the medium-term. Increasingly these will cross international boundaries of jurisdiction and language. Be one of the organizations who is prepared and be ready to reap the competitive advantage.