Compliance: LIBOR, Dodd Frank

Scales of Justice Legislation and Regulation

Modern scandals in financial services revolve around recorded data because, to misquote Fox Mulder, the truth is in there. When the recording medium is magnetic tape, however, the task of unearthing that truth can be Herculean in scale.

A senior technologist at a major European bank recently confessed to me that to reconstruct the volume of trading data that the CFTC could legitimately demand inside a 72-hour timeframe would take his entire team, working around the clock, until 2038, that’s the year, not 22 minutes before 9pm.

From Non-Compliance to Criminality

As the political wranglings have eventually receded enough for the regulatory demands of Dodd Frank to emerge, the scandal that precipitated its inception, and others which have followed it, have rather stolen center stage and the associated fines have certainly hogged the media limelight. This is an interesting development because unprecedented fines like the $13Bn for JP Morgan’s role in the 2007 MBS scandal, the £1Bn for the wire fraud committed in their “London Whale” scandal and the re-emergence of the LIBOR scandal which sees Fannie Mae suing 9 banks a total of $800m for fixing interbank lending rates, are flagging a transition from regulatory to criminal proceedings.

The complexity of the 2007 misdemeanor was far greater than that of the more recent transgressions. All three revolve around concealed mistruths but whereas the subprime mortgages in the MBS affair were hidden behind intricate layers of deceit constructed by Ivy League mathletes, the latter two come down to very straightforward conversations between traders. In the case of LIBOR it was relatively easy to uncover suspected fraud in a system that had relied on trust. Emails, IMs and phone calls were interrogated to find such illuminating comments as:

 “Pls [sic] go for 5.36 again, very important that the setting comes as high as possible. Thanks.”

At least he had manners.

The Compliance Technology Challenge

Western economies rely on capital markets working, even when the public and politicians want to make banks really struggle for it. For an industry which inflicted pain and lost trust following the loosening of its regulatory leash, it is natural that the grip should tighten and transparency be demanded. It is clear that 6 years is no longer an acceptable timetable for getting one’s story together but, as we’ve seen, the legacy technology is incapable of achieving this except for in the most recent, digitally recorded era. Even then, although the latest innovations on the market may be able to generate the data it only happens in the way a mains pipe brings water to your house; it will make an expensive mess if you don’t install some intelligent plumbing to manage it.

What is needed is an intelligent search engine to interrogate multiple channels in the same way Google scours the internet. Having led major institutions through successful implementations of fixed and mobile voice recording in Europe, our principal consultants in this field are well placed to help you achieve regulatory and legal compliance with workable business solutions. We are also excited about some proprietary semantic matching and computational linguistics technology which could present a breakthrough in the race to analyze legacy audio files in the required timeframes. It may not be our firm that leads your organization through the maze towards compliance but with the punitive stakes raised by both pecuniary and penitentiary consequences, we know many of you will be on the same journey. JP Reis will be leading the offense again, shaping the way that technology is harnessed to solve compliance challenges while maintaining operational efficiency.