The push for compliance tech to be flexible, not ‘a burden’

Leaders in any industry must anticipate the challenges–and opportunities–their companies face. In financial services, trade surveillance is of critical importance. So, as compliance practitioners responsible for trade surveillance, the ever-present question is this: Are we keeping pace with current and future challenges?

Maybe not. Consider the following examples of surveillance failures and increased scrutiny of surveillance practices by regulators around the world:

• 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 request.
• The SEC’s ambitious market structure proposals may have material consequences for trade surveillance parameters.
• UK regulator the Financial Conduct Authority’s Market Watch yet again reminds firms to conduct risk assessments and make sure their controls detect market abuse.
• Enforcement priorities across jurisdictions in Asia-Pacific 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 detailed in a recent report by Eventus, 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 broker-dealers in the US 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.

One theme we continually hear from these audiences is the need for flexible compliance technology to empower their teams, rather than technology acting as a barrier or burden. In a recent survey conducted by Acuity and Eventus, 94% of respondents cited increased complexity over the past three years as a key challenge to structuring effective trade surveillance operations. 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–regardless of whether they are working 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 they must anticipate and prepare for all of this while simultaneously trying to lower the total cost of ownership.

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 needs to be adaptable and must allow teams to have a real say in how technology works for them. That’s the true opportunity amid this challenge.

Joe Schifano is global head of regulatory affairs at Eventus