Post-COVID Trader Voice Compliance

On March 10th we talked about business continuity and disaster recovery in the face of COVID-19. Since then, the situation in mainland China and Hong Kong has stabilized but in Western Europe and the USA, things have deteriorated quickly as the growth of new cases and fatalities continues to accelerate. JP Reis is a compassionate business and our thoughts are very much with friends and family and anyone affected by the disease, but we are still intrigued by the changes that will emerge due to the disruptive effects of the virus. Compliance is of particular interest.

In 2001, the effects of 9/11 were devastating in the area around Ground Zero. JP Reis consultants were heavily involved in the back-breaking and laborious recovery work. Initiatives proposed by our CEO, Greg Collins, changed how fixed and switched wide area communications systems survived and recovered from many types of incidents in New York. The markets responded quite strongly.

When SARS broke out in East Asia, the Hong Kong Monetary Authority sent out advice but it was mostly about controlling infection rather than anything regulatory as we would understand it now. Still, the experiences of SARS have led to countries in the region being relatively swift and decisive in their response to new outbreaks.

The financial crash of 2008 was a different animal with the problem having been generated inside the banking industry. Some banks failed, some were bailed out, and stability of the global banking system had to be addressed. Legislation and regulation were ramped up in order to prevent a repeat of the crash. 12 years later, initiatives like the stress-testing of cash reserves to stem liquidity crises have stuck and there are fewer sub-prime mortgages. However, especially in America, wider protections for consumers, investors and borrowers have been rolled back and diluted as the current administration pursues a broad deregulation of the financial system.

The financial impact of COVID-19 is likely to put the 2008 credit crunch into the shade as many industries will see widespread failures despite the robust stimulus and protection packages offered by many governments. As with the previous events, regulations will be amended, and new working practices, borne out of necessity, will stay.

Trader Voice

Trader Voice remains a specialist focus for JP Reis. Since 2008 it has become an increasingly challenging area in terms of compliance with the expectation now being that auditors and investigators should be able to reconstruct the communications leading up to any trade. Many banks have fallen foul of regulations, and legislation, for either not making the recordings, not keeping them, not being able to demonstrate the ability to reconstruct conversations, and, of course, for illegal trading. Adoption of fit for purpose systems and internal processes has not been consistently achieved. 2020 will be an interesting test, trading companies have already had to use disaster resources and implement operational changes that few would have foreseen. The regulators have already made announcements that provide a level of flexibility for these unprecedented circumstances.

Trader Voice Equipment

This year is the first time that almost every trading organization will have to adopt contingency procedures and resources, including reactive ones, to cope with the operational restrictions imposed to contain the pandemic. In some cases, banks were using disaster recovery facilities very early in order to split groups, acieve social distancing and reduce the spread of infection. In general practice, disaster recovery facilities are provided for around 40% of key trading staff. In our experience, despite the best efforts of IT departments, workstations and trading turrets (dealerboards) aren’t set up how the traders want them. Modern trader voice systems [TVS] allow the trader to log into any turret and access their full configuration but we still see whole trading desks and small floors where generic logins are still used.

Depending how long restrictions last, 40% of operations may not be enough. As we said last time, duration is a commonly overlooked aspect of DR planning. Theoretically, trading floors that have adopted soft clients as primary endpoints may be relatively well placed to ride this out and that won’t go unnoticed. We often advise that soft clients can’t replicate full turret functionality for the high capacity user, but this could be a catalyst to close the gaps. For banks with soft clients in place for DR purposes, who have the required licenses in place, this will be a steep learning curve. Not only is the user experience very different to normal turret use but there are also several technical issues with using soft clients for high capacity voice traders:

  • The stadium effect – the user hears a hoot announcement from multiple nearby computers as latency adds an incremental transmission delay, the lack of synchronization can be irritating and off-putting;
  • Sound quality deteriorates the more channels are coming over the PC speaker;
  • Other PC notifications also come out of the main speaker;
  • Turrets have considerable computing power that a software installation can’t provide, leading to possible processing issues;
  • PCs and laptops can lock up or slow down on a regular basis.

As with 9/11, this could be the event that drives the solution to these problems and accelerates the eventual migration to software trader voice.

Trader Voice Compliance

Generic logins, as mentioned above, present a potential compliance violation because regulators and investigators need to know who is talking at any given time and if an identity can’t be linked to a device, it increases the complexity. The modern free-seating login system overcomes this issue. We have also seen new systems that claim to have built in voice recognition.

A global crisis like the one we are experiencing always causes volatility and there is huge pressure to keep traders trading. We are facing a situation now where the majority of traders could be working at secondary or tertiary locations. This increases the risk of problematic trading activity and history tells there will be non-compliant behavior by some, so regulation can’t stop. With trading staff taking precedence over compliance staff for the allocation of DR resources, it is likely that some non-compliant communications will be used to support unethical trading. With leaders in some countries desperate for indexes to recover, it will be interesting to see how heavily trading activity is monitored and investigated in the coming years.

Regulator Response

Times are moving so quickly that, even as we were drafting this commentary, the CFTC in the US and ESMA in the EU were releasing statements. In both cases, the regulators underline the importance of keeping markets open while recognizing the technical challenges of imposing recording and time-stamping policies in contingency trading environments. Whereas the CFTC focuses on relief from regulatory constraints for the trading of certain asset classes, ESMA appears to take a stronger stance, calling for different methods to be used to record the data required by MiFID II. Tellingly, the CFTC also warned investors to be wary of fraudulent behavior.

The Future

COVID-19 will eventually come under control but there will be a long period of recovery from the damage to the global economy and people’s lives. With respect to trading floor best practice and the regulations that seek to control activity, there will be changes but it’s very hard to predict what they will be. Some trading institutions will have a wake-up call about what true disaster recovery really entails, and Trader Voice is likely to transition further into the software-based era. As for regulation, there appears to be a divergence between two global trading centers. We hope that steps taken to maintain trading fluidity now achieve their goals without being the first on a path to the next 2008 style crash.

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