How do MARket participants justify surveillance spend in an era of cost cutting?

Dave Tollaway, Alerts4 Financial Markets

With MiFID II now confirmed and MAR just around the corner, Dave Tolladay of Alerts4 Financial Markets examines the key questions facing financial institutions having to increase trade surveillance monitoring spend while reducing costs.

Between €500 and €700 million – that’s the estimated one-off compliance cost to be imposed on financial firms carrying out a review into MiFID II, according to a consultation report released by the treasury.

The problem is that almost a year on from this document; financial firms have still been reluctant to increase spend on trade and comms surveillance. One possible reason is the contradictory challenge of needing to reduce costs while investing more in trade surveillance due to regulation.

And there is certainly no shortage of things to think about when it comes to regulation. For example, the extension of MiFID II to other asset classes brings a number of new surveillance requirements. But the complex nature of today’s markets makes it tricky for firms to extend existing surveillance technology across asset classes – all of which have different nuances. If this wasn’t enough to think about, the industry also has to factor in MAR on July 3rd.

Clearly investment is needed. It is no good trying to address each regulation individually. Market participants need to adopt a strategy that can meet growing regulatory demands against the backdrop of internal pressures to reduce costs – no easy task. In light of this, there are some pressing questions firms need to ask before coming up with an effective and efficient solution.

What should and shouldn’t be automated is a good place to start. A fully automated approach for one firm may not be right for another. Take the scenario of a business trading just a small number of high-value trades. A full blown cross asset trade surveillance system is unlikely to be the answer. While it may be just a handful of small trades in question, they could be highly complex ones – such as an asset backed security. In this case, they may need someone to look at exactly what is being traded to ensure everything is above board.

Conversely, if another firm processes 10 million orders a day, a much higher level of automation is required. Ultimately, in both situations, the firm in question needs to ask how efficient their automation is and are they making effective use of their risk management and compliance experts?

With this in mind, and taking into account pressures from the business to slash expenditure, surveillance teams need to ask themselves whether they are operating efficiently. For example, is it still acceptable to have siloed monitoring, comms separate from trades, or one asset class separate from another? If surveillance departments don’t question their approach, new behavioural patterns are sure to get missed. On the flip side, finding answers could be a heavy IT expense. One possible way for surveillance teams to achieve greater efficiencies is to strike a balance between integrated monitoring of data cross asset class, and implementing specific processes to ensure thorough checks are carried out across other data sets.

Of course, certain firms may only have a limited number of people with the skillset to be able to monitor at a highly sophisticated level. In this case, efforts could of course be put into outsourcing certain functions in a bid to keep costs low. While this may be cheaper, external people do not necessarily have the market knowledge or experience to look for signals and hold traders to account. The challenge here is that certain tasks can only be carried out by experienced analysts. It is a case of making the most effective use of analyst’s time. One way is to increase the use of junior staff for certain tasks. Another could be using technology to reduce the time senior analyst’s spend on mundane activity.

The upshot is that by addressing these issues now, market participants are putting themselves in a strong position to fully assess the current effectiveness and efficiency of their existing approach to surveillance.

Only once these questions have been tackled will firms be able to make the right decision about their future financial trade surveillance and comms monitoring strategy to handle combined regulatory and internal cost pressures.