Thoughts on SMR: A view from a grizzled ex-trader

Fonetic Team
Tuesday, 25 June 2019 / Published in fonetic, voice surveillance, SMR

Thoughts on SMR: A view from a grizzled ex-trader

The biggest changes in the financial sector have all come in the last 11 years and have been accelerated by the changes in worldwide regulation that resulted after the financial crisis in 2008. Fast-forward to 2019 and a lot has changed. Sandy Broderick, Product Advisory Board member reflects on his experiences in the industry. 

2019 – and haven’t things changed?

I moved from IT to trading in December 1989, primarily because I had learnt how to price derivatives from writing the systems. It was the wild west then - we made payments, created documentation, agreed valuations & pricing methodology and instructed legal all from the front office.

Fast forward to 2019 and it is a different world!

The biggest changes have all come in the last 11 years and have been accelerated by the changes in worldwide regulation that resulted after the financial crisis in 2008.

All of the functions mentioned above are now, correctly, distinct and independent of the front office. The oversight and responsibility for all of these has, however, until recently, been blurred and tenuous with multiple lines of sight and unclear authority and control mechanisms.

That changed in the UK with the implementation of the Senior Manager Regime (SMR) in the 2016 for large sell side firms.

Other firms be warned. This is coming your way soon!

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This directive introduced a template defining clear, clean authorities and lines of communication with distinct delineation for different roles and controls. 

SMR will require personal accountability

This has resulted in a much greater need for individuals to be aware of everything for which they have any degree of liability. The potential repercussions for any issues or failures to comply are large and could be personally ruinous.

If I use the example of my previous role as head of desk for a derivatives trading operation, anyone now holding that position would have accountability for at least the following:

  1. Voice recording and monitoring for both turret and mobile communications 

  2. Pricing methodology and valuation

  3. Confidentiality of customer information 

  4. Good record keeping and accurate trade entry and maintenance

  5. Oversight over behaviour and risk management of all staff directly reporting to them

  6. Reliability of fundamental systems and knowledge of areas of risk

  7. Index submission accuracy and price consistency

  8. Social media and instant messaging recording and monitoring

  9. General compliance for the bank and individuals with national and international regulations

This is only the beginning, some of these lists can go on for dozens of pages. Under the regime the senior manager has to report anything that they are uncomfortable with in these functions to the person with direct authority for the maintenance, development and correction of issues identified as being problematic.

I have had exposure recently to the current regulatory technology employed at a number of institutions for voice recording. Despite the high volume of investigations which have subsumed most banks since 2012, this remains largely unchanged since the 2008 financial crisis.  Whilst trade surveillance is well evolved it is a different story for voice and eComms. Voice, instant messaging, email and many others are recorded and simply stored away without automatic analysis. Firms feel that they have adequately met their obligations despite being effectively oblivious to the activity taking place under their roof. The MIFID rules state that sampling is enough. The way this is dealt with, at a majority of firms, is for an member of the compliance team to spend hours or days in blank eyed tedium listening to unqualified, random audio recordings or reading reams of text which reveal nothing.

When an actual investigation is called for this, it results in huge amounts of money and time being spent on lawyers and consultants who carry out the manual extraction and transcription (usually with a high degree of inaccuracy) of voice, IM, and deal information to satisfy the regulators or provide evidence for ongoing legal cases. 

The regulator is about to get tough on this. No longer will it be acceptable to have ‘just adequate’ or “better than the guy next door” systems. 

The responsibility of everyone subject to SMR is to examine their capability and ask questions of the head of trading, head of IT and compliance departments about potential improvements. 

The benefits of voice and eComm technology 

Many of those that fall under SMR have simply clicked their way through the training modules. It is seen as an obligation to pay lip service to, and for someone else to worry about. They are not aware that technology exists to capture, transcribe, translate, and automatically monitor voice and IM with a high degree of accuracy. These conversations can then be tied and bundled with live deals, quotes and all relevant data automatically- removing the need for manual intervention.

The few firms that have invested in cutting edge voice/eComm solutions have seen the following benefits:

  1. Much quicker resolution of regulatory investigations at reduced costs

  2. Anticipation of problems and bad behaviour in advance of independent allegations. NB. Bad behaviour can be market based (front running, manipulation of indexes, etc) or can be HR based (#metoo, bullying etc)

  3. Long term reduction in manual oversight and investigations means resources can be re-allocated for productive tasks

  4. No more listening to endless hours of conversation in a dark room searching for vital information. (Especially if you have been embarrassed listening to some of the very inappropriate things said to partners (and ‘good friends’) whilst trying to find the correct moment in time!)

Some final words

For those that fall under SMR it is imperative for you, as an individual, to look at these responsibilities you have signed up to and follow up on any deficiencies. Remember that large SMR document you didn’t read and just signed when given it by compliance? Go back and take a look at what you have to follow up on; otherwise you will be the one culpable for any problems and, as a result, have to go home, sell the house and tell the children that this year’s holiday is not to the Caribbean, but to the caravan.

Sandy Broderick
Member of the Fonetic Product Advisory Board

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