GUEST BLOG POST
Leaders in any industry must anticipate the challenges–and opportunities–their companies face. As compliance practitioners responsible for trade surveillance, are we keeping pace with current and future challenges? Some evidence to consider:
- A top-tier bank was found to have no surveillance on its voice-brokered swaps desk, resulting in a $45 million fine for spoofing.
- FINRA warns about “non-specific surveillance thresholds” that are “not reasonably designed” based on their 2023 exam findings.
- The CFTC plans to invest in a “robust market surveillance unit” as part of its double-digit budget increase
- The SEC’s ambitious market structure proposals may have material consequences for trade surveillance parameters.
- The U.K.’s FCA Market Watch yet again reminds firms to conduct risk assessments and make sure their controls detect market abuse.
- Enforcement priorities across jurisdictions in APAC all cite concerns regarding market abuse, e.g., MAS in Singapore, SFC in Hong Kong, and ASIC in Australia.
While the compliance professionals I speak with are well aware of this regulatory scrutiny, are firms deploying trade surveillance resources efficiently to meet the risk?
As Eventus details in our recent report, global regulators are pressing compliance leaders to reassess their trade surveillance capabilities and to ensure they have tailored these systems properly to the new risks they face. For example, the SEC and FINRA said they examined nearly half of the 3,500 registered U.S. broker-dealers last year. These exams help the regulators collect information to promote compliance, prevent fraud, and monitor risk. Sometimes, these exams expose serious concerns that lead to wider enforcement investigations.
With time and experience, many practitioners note a pattern: new rules and guidance, followed by warnings, then, unsurprisingly, enforcement. Too often, updates in compliance systems, alert parameters and processes that could have prevented many headaches lag behind regulatory scrutiny. The problems are well-known: pressure to lower the total cost of compliance operations, legacy technology that is unresponsive to ever-increasing false positives, markets that grow increasingly complex, and pressure to lower the total cost of operating.
My colleagues and I come from roles and organizations that have felt this pain. Today, I speak with a range of compliance leaders across the globe who are serious about compliance and care deeply about getting trade surveillance right. These are professionals in broker-dealers, banks, FCMs, exchanges, prop trading firms, and digital asset platforms.
Increased Complexity
One theme we continually hear is the need for flexibility in their compliance technology to empower their teams, not act as a barrier or burden. As shown in our recent survey, 94 percent of respondents cited the increased complexity and challenge of trade surveillance over the last three years. These leaders rarely believe that maintaining the status quo is the safe option and they want flexibility and expertise built into their systems.
As our recent report concludes, global regulators are scrutinizing firms with outdated parameters or alerts not tailored to their businesses. Like financial debt, being weighed down by technical debt can harm a firm’s bottom line and reputation.
The most experienced compliance teams–whether in broker-dealers, banks, or exchanges–look forward, with at least a five-year time horizon. They anticipate what behaviors their firms are exhibiting today that regulators might question in the near future. For example, the spread of encrypted mobile messaging apps a few years ago inevitably led regulators to crack down, issuing warnings and fines. Today, we can anticipate that issues like cross-product manipulation, multi-asset surveillance and having adequate explainability in machine learning will be part of investigations and enforcement cases for the rest of this decade. And, all of this while trying to lower the total cost of ownership.
The opportunity amid this challenge is that the industry has the expertise, experience, and now technical flexibility to build market surveillance for specific needs. There is a renewed desire to get to the risk quicker with top talent and improved efficiencies. The new paradigm dictates that compliance software be adaptable and allow teams to have a real say in how technology works for them. 
Joe Schifano is Global Head of Regulatory Affairs at Eventus