Actiance had the privilege to speak on a panel at the Toronto MaRS Discovery District last week about RegTech and “What Regulation and Technology Mean for Market Participants in Monitoring Trading Activity”.
The seminar, hosted by Actiance, IBM and Sigma Analysis & Management, was attended by hedge funds and asset managers looking to learn how both the regulators and industry insiders are addressing the rapidly changing ‘RegTech’ space, particularly with respect to trade surveillance.
The panel focused on how regulators have evolved their surveillance programs and how buy-side and sell-side firms are adapting their internal policies and procedures related to trade monitoring to address legal and regulatory concerns and technological advancement.
The panel consisted of a number of industry experts, including:
- Megan Vesely, JD: Moderator and General Counsel, Sigma Analysis & Management Ltd..
- Sonali Bhavsar: Associate Partner, IBM Watson Financial Services Solutions.
- Sidney Wigfall, JD: Managing Partner, SCA Compliance Consulting Group, LLC.
- John Pepe, JD: Analytics and Regulatory Specialist, Actiance
Some of the insights provided by panelists are summarized below.
Q: How has technology changed the regulatory space for financial services firms in the last 10 years, particularly with respect to trade surveillance?
Panel: ‘Big Data’ technologies, such as Hadoop and distributed computing, in recent years allowed technology departments to store and analyze mass amounts of information quickly and cheaply. Firms have never been able to centralize and analyze all data in a ‘data lake’ before. This allowed for event correlation between trades, eCommunications, and other data to perform reconstruction as required under Dodd-Frank and now MiFID II. The Panel attributed the recent regulations requiring reconstruction to initiatives in place by the regulators themselves to use these technologies for surveillance and market conduct (i.e. SEC’s Quantitative Analytics Unit, CAT).
- Separate from technology per se, what have we seen on the regulatory-front since 2008 in the US and Europe?
Panelists see a push towards market and information transparency. Dodd-Frank and MiFID / MAR are examples of regulators pushing firms to upgrade systems so that all data can be accessed and provided to regulators quickly for their own investigations. Noted was that these regulations in the US are really just an update to ones, such as 17a-4, that have been on the books since the 1930’s.
The argument was also made that regulatory relaxation in the 1990’s (Glass-Steagall) contributed to the 2008 crisis by allowing Banks to own Broker-Dealers. Dodd-Frank and Volcker is a step back in the direction of Glass-Steagall.
- How have those American/European regulatory changes affected legal/compliance groups, particularly with respect to monitoring and surveillance?
The Panel collectively saw a heavier reliance on technology and the replacement of traditional compliance officers with investigators skilled in data science.
- What are challenges for these groups, banks, funds, asset managers, etc. in complying with these regulations? Costs, Data, Board Support?
The biggest challenge noted was the lack of regulatory guidance as to what a good holistic program should look like and what tools and technologies should be used. The result is forced collaboration between equally novice market participants trying to reinvent the wheel over and over again when regulators know that certain firms have it right. The tendency is for hedge fund and asset managers to not share knowledge openly.
Frustrations noted were that regulators teach what ‘not to do’ by publishing regulatory enforcements.
John Pepe, JD (Actiance) mused that regulators should also publish when firms do something exceptionally well so that others can learn from it. The only time we see this information is when firms win enforcement cases brought by regulators.
- What information is necessary and how does a compliance or risk group access that information?
- Trade Data
- eCommunications Data
- Data Lakes / Warehouses vs. siloed systems
- Noted: Actiance built their own object-storage platform to address this industry issue
- Noted: IBM developed Watson for Financial Services to access and use the collected information to derive value
- Analytics and risk assessments
- What about firms with multiple order management systems? What about firms that use an OMS and are still doing things manually?
- Data quality is an issue. Data Warehousing can solve some of this, but it can be expensive to build and maintain. The natural push is to data lakes as they are cheap and easy and store the data as original objects with all necessary metadata (i.e. Actiance Alcatraz).
- Assuming all of this information – trade data and communications – what queries are asked?
- Compliance groups are trying to understand trends, anomalies, and holistic risk.
- Regulators are looking for transparency and whether the firm’s tools found what the regulator’s tools found.
- Regulators are requiring all records stored compliantly and fast information production times.
The Panels raised a well-received point that technology only solves part of the problem and must be supplemented with policies, procedures, and controls for review and escalation. Having the greatest technology without any process or follow-up is of no value.
Best practices: collaborate with industry peers. Consultants are useful, but get referrals from others who tackled the same issue (i.e. SCA Compliance Consulting). Look for consultancies that have former regulators on staff.
- Role of technology and liability. With respect to focus on CCO liability, do we anticipate that automated surveillance solutions may mitigate a compliance officer’s exposure?
Similar to how technology will only be part of the compliance solution and must be surrounded by Board support, adequate resources, and policies, procedures, and controls, CCOs must have reasonable programs in-place and not be ‘willfully blind’ to compliance concerns.
Firms are watching closely for the first CCOs found liable for their compliance failings so that lessons can be learned.
- What do we see happening under the Trump Administration? Changes in the EU?
Based on what the Panelists have seen so far, the Trump Administration will push toward a pro-business agenda. If regulations get in the way then we will see initiatives to repeal some that are not popular with either US political party.
For the EU, noted was a move away from prudential- or principal-based regulation to more of a US model of rules-based. We are seeing this in MiFID II.
Key takeaways from the Event
- Regulators are generally 5 to 10 years behind in technology advances, but this gap seems to be closing as tech-savvy generations take leadership positions.
- Mainstream ‘big data’ technologies now give the ability to store, process, and analyze information to provide insights like never before. Firms may use this to reduce operational and compliance costs as well as for revenue opportunities. Regulators will also use these technologies for market conduct and will assume market participants must do the same.
- Analytics and Artificial Intelligence are the engines driving the RegTech movement. The products coming out of RegTech initiatives will enable firms to apply human understanding to transactional and eComms monitoring to allow lots of data to be analyzed efficiently. This leads to more issues found while utilizing less people.
- Recent announcements by large, Canadian banks around ‘digitization’ efforts are the first wave in the RegTech, and FinTech revolution.
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