Capital Markets Surveillance 2014: From Defence to Opportunity
As FX becomes the latest asset class to fall foul of the regulators and is under increasing legal scrutiny, the urgency for firms to apply better forensics, understand risk and stamp out potential abuse has reached monolithic heights. The growing weight of individual regulations against the functional silos mean many organisations are focused on satisfying the latest local regulatory requirement without considering the larger picture of the aggregate businesses. As the regulators bark turns to bite and the level of complexity escalates, firms need to find ways to protect themselves in order to remain in business. By optimising a firm’s knowledge base, regulatory necessity can in fact be transformed into a business advantage; creating behavioural monitoring tools allows firms to take risk and compliance requirements beyond regulation.
Regulatory timelines are shortening amid political pressure in Europe which is adding weight to the breadth and depth of the European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) II. Extending the notion of market abuse, Europe has also elected to criminalise insider trading and market manipulation, all of which will usher in a new era of personal accountability for individual traders. Europe’s new Market Abuse Directive (MAD) will extend across all financial instruments and the reporting of suspicious transactions extends to unexecuted orders and over-the-counter (OTC) transactions creating the new to scrutinize all order flow, even if it is never executed.
Anomalous behaviour is not only typically found in the most hard-to-capture data but supposedly benign activity can take on new significance when placed in new and different contexts. Patterns of activity can be masked, throwing up challenges in establishing false positives against legitimate activity. Merely generating standardized alerts to monitor the quantity and quality of these over time is inefficient and leaves firms dangerously exposed to the possibility of either being flooded with alerts, or raising tolerance levels to reduce the noise.
This research note looks at three areas of trade analysis, pre-trade risk and risk aggregation, and investigates how more effective and contextualized analysis will enable firms to not only safeguard against unnecessary risk and market abuse, but also unlock the true value of the data that is hidden in plain sight. Turning bytes of data from a host sources into information to meet regulatory requirements is just the start. Those market participants with strong data governance and flexible technology will be well placed to manage their costs; as well as able to monitor real-time trading strategies on a cross product global scale to understand where their boundaries of risk lie at any given moment in time. The ability to create a holistic overview incorporating low latency messaging with in memory data will deliver flexible solutions – not only to cope with current and future complex regulatory and compliance reporting, but by optimising IT and data architectures, deliver transformational advantage in the process.