Buy-side trading has become increasingly sophisticated over recent years. More complex asset classes are being included in portfolios which has called for Asset Managers, Wealth Managers as well as smaller hedge funds and broker firms to consider implementing automated surveillance tools and technology.
Arguably the greatest challenge for market advisors is the number of global regulations and the increasing pressure from regulators to ensure their investment and trading divisions follow the rules. The UK’s Financial Conduct Authority (FCA) announced their intentions to put buy side firms under the spotlight in 2019 and ramp up enforcement around market abuse and insider dealing.
Arguably, the greatest challenge for market advisors, brokers, hedge funds and asset or wealth managers, is the number of global regulations and the increasing pressure to ensure their investment and trading divisions follow the rules. A key element to this is implementing an accurate compliance platform for buyside business.
Brokers must adopt market abuse controls in 2019
The recent decision by the Upper Tribunal in the UK regarding Linear Investments Ltd provides a stark reminder that firms, whatever their size and complexity, must conduct their own market abuse surveillance processes and controls. Especially now that the buyside are executing more of their trades and orders directly.
This requirement is not new. In the past, some buy-side and prime broker firms would rely on their sell-side counterparts to meet irritating and costly FCA requirements like transaction reporting, phone taping, market abuse surveillance.
Firms should use Upper Tribunal’s decision as a reminder to Boards and senior management of the need for their operations to be properly and completely covered by surveillance processes and controls around trading and other activity relating to trade execution including voice records.
What are the buy side benefits of effective voice control?
Aside from meeting regulatory obligations, effective voice surveillance solutions can also bring business value. In fact, buy-side firms who have informed their brokers they have voice surveillance have seen a noticeable improvement in behaviour and price spreads.
So, why should you be investing in Voice Surveillance?
You need to evidence individual accountability
The Senior Managers Regime (SMR) is about to throw the proverbial book at firms which haven’t heeded its warning. Buy side, the FCA is looking at you. In this blog post you can read about the 6 fundamentals firms will need under SMCR.
Currently, there are not enough high-profile cases of senior managers being personally prosecuted. There hasn’t been any news in the press of a Head of Desk going home to theirfamily and informing them they will be drastically downsizing, and he or she will never work in finance again.
SMR will be continuing to be something that’ll happen to other people. This is gradually changing; senior managers now have to show reasonable steps to prevent fraudulent behaviour among within their business areas.
Detect insider trading and market manipulation
Comprehensive communications surveillance is a critical part of managing the risk of insider trading. In various jurisdictions, insider dealing offences include using inside information to cancel or amend a pre-existing order.
Transmitting false or misleading information or any other activities that are intended to manipulate the calculation of a benchmark are no longer just a sell side issue. Asset managers are now equally required to have adequate controls in place for monitoring their trader and portfolio managers’ activity.
Financial institutions need an effective solution to monitor all employee communications. This helps them mitigate risk and proactively identify inappropriate and potentially illegal activity, which would damage the firm’s reputation and violate their clients’ trust.
Identify intent before a transaction is made
Some behaviours are hard to track. The focus isn’t just on post-trade compliance but also pre-trade compliance and surveillance. According to MAR regulation, intent to commit insider trading and market manipulation is just as criminal as the successful act itself.
With the right tools, technology and team behind it, brokers and other financial advisers are able to detect suspicious activity which may lead to market abuse or other fraudulent activity.
Catch false or misleading information
In order to comply with MAR on market recommendations, firms can use our predefined policies to catch the use of misleading information or agents that are trying to sell products to ineligible counterparties.
Voice channels are a firm’s most vulnerable communication. This is because the trading population are fully aware that voice is still relatively unmonitored. This makes many of them willing to take risks and continue abusive behaviour such as misleading customers.
The proven approach to voice has arrived
The financial landscape is evolving. Regulation is becoming increasingly difficult to navigate. A proactive approach to communications surveillance is crucial to achieve complete coverage and protection from fraudulent activity.
Trade Comms Suite includes many features to tailor for buy side business including predefined scenarios for detecting insider dealing, benefit overstatements and the warning signs of putting pressure on customers. We have developed the most accurate voice surveillance technology currently available on the market. For more information you can also download our whitepaper on the proven approach to Voice Surveillance.
What was before a reactive response and fewer repercussions, has become a time where senior managers will be held personally accountable for any violations within their responsibility.
Nick Child, Chairman of the Fonetic Product Advisory Board shares his experience in the past: “On many occasions we would have buy side firms wanting to access our voice tapes to listen to conversations we had with them- clearly they did not have tapes themselves! Not all of them were like this but some were. This is clearly wrong, but it has always been buy side practice to rely on sell side firms to fulfil their obligations on things like transaction reporting and surveillance. This clearly has to stop.”