PwC Market Abuse Surveillance Survey 2016

One of the biggest challenges in financial markets is how to conduct effective surveillance to spot market abuse and rogue trading. Surveillance has yet to deliver as a fully effective tool for preventing market abuse in financial markets. That’s largely owing to limitations in technology and a lack of clarity about optimal organisation of responsibilities and activities.  But the stakes are too high for the banks to do anything other than invest further and rely on emerging technologies to plug the gaps.

Our thoughts on the findings of the PwC Market Abuse Surveillance Survey

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Graham Ure

PwC Surveillance Survey, Harnessing your surveillance technology We are delighted to publish the results from our Surveillance Survey; which is intended to bring greater transparency to the industry and regulatory bodies, helping our community understand progress made and the challenges ahead.

As a technologist by trade, I focus on whether surveillance solutions really work and the technical advancements needed to take surveillance to the next level.

There are three key findings in this area:

  • The technology;
  • False positive rates; and
  • Integration

So, let’s start with the technology itself. It is clear that one solution really does not fit all. 66% of respondents are using three or more vendors to deliver their surveillance requirements. Each vendor’s approach is slightly different and banks are dissatisfied by having to cast a wide net to gain comfort.

To make matters worse, users are frustrated by surveillance technology. 50% of respondents stated that false positive rates are unacceptably high, putting real pressure on individuals at banks to work harder and faster.

Finally, we asked respondents what single change would have the greatest impact on their organisation. The clear response – integrated surveillance systems. This is the holy grail for most banks – joining the dots across data to make the right decisions is vital.

For more on these issues and to view the full results of the survey visit our website.

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Ruk Permal

Welcome to the results of our Surveillance Survey; this survey should help all those working in financial services to understand where progress has been made and what challenges lie ahead in the world of surveillance.

I have worked on a number of market abuse and rogue trading investigation and remediation programmes over the past 10 years. Most banks agree that better guidance, operating models and surveillance could have prevented those issues from happening.

There are three areas of interest coming out of the survey for me: (1) Direction from the regulator; (2) A shift in the surveillance operating model; and (3) Using surveillance to do more.

Let’s start by looking at Regulatory Direction.

  1. Banks expressed concern that the regulatory landscape is changing quickly, along with industry best practice. Implementing large scale technology solutions can take years, and inevitably regulatory expectations move on in that time.. Banks would like to be on this journey with the regulator, so they are clear on the direction of travel and can work more closely with vendors to be ready for change in the surveillance space.
  2. Secondly, we found a clear trend emerging that surveillance effort is now being performed in the first line of defence with one-third of respondents having a dedicated surveillance team. Indeed, 50% of our respondents also stated that surveillance alerts should be reviewed within the first line of defence. This is a real change.
  3. Finally, banks are now beginning to use surveillance alerts to profile future risks - this is at an early stage, but almost 50% of respondents have made a start on this already.

Thank you for tuning in. Please do take a look at the full results from our survey online for more on this and other themes that have emerged.

In the last five years, financial institutions have incurred losses from rogue trading incidents, and have been investigated and fined over allegations across a range of market abuses.

Interbank rate and foreign exchange market manipulation have cost the banks over $19bn in fines globally(1). The FCA alone issued in excess of £1.4bn in fines relating to these issues between 2013 and 2015(2).  Regulators increasingly expect banks to monitor communications and trading activity to help identify and prevent future instances of market abuse.

However, over 140,000 people work in banking in London alone. That equates to tens of billions of emails, messages and phone calls every year. In a fast moving environment, those communications often use highly colloquial language and rapidly evolving terminology. And to be truly effective, surveillance needs to be able to spot new or emerging forms of abuse - likely to involve only a few traders and a handful of transactions – in this ocean of data. The question is whether banks can really use surveillance as an effective tool to prevent future instances of misconduct, market abuse and rogue trading, reading every message and checking every trade, or are the challenges too great?

Surveillance survey

To gauge banks’ estimations of the challenge and to provide more transparency to the market, we developed a survey focused purely on surveillance. Our aim was to help understand:

(i)      How banks are responding to regulatory developments

(ii)     Whether any industry standards are emerging

(iii)    How surveillance capabilities compare across the sector

In all, twenty of the largest global banks participated in the survey, each with a significant presence in EMEA. The survey was conducted during December 2015 and January 2016.Download the full survey findings here

Key questions

The survey highlights that banks are taking surveillance very seriously, and backing that commitment with extra investment and larger dedicated teams. But a number of fundamental questions remain.

Are banks truly on top of trader chatter?

Many banks use lexicons – libraries of the key words and phrases that may indicate suspicious behaviour – to support their surveillance of the millions of messages they generate each day.

But are lexicons dynamic and agile enough to capture the increasingly subtle and obfuscated language that traders use? Historic investigations across the financial services sector have highlighted how criminally-minded traders use code words and creative slang to disguise abusive behaviour.

Will natural language processing techniques or new advances in voice analytics provide a better result, or will the growing sophistication of wrong doers mean they continue to elude detection?

Is surveillance technology really delivering?

Over the past 18-24 months, we have seen a number of new entrants to the surveillance market, providing a genuine alternative to traditional vendors. These new surveillance vendors seek to address aspects of the "big data" conundrum, tackling the challenges of analysing large volumes of data structured in myriad forms quickly enough to prevent potential abuses occurring.

While the innovation driving vendors to bring new ideas and approaches to surveillance is welcome, is there a danger that the proliferation of choice and analytical advancements is causing more confusion rather than clarity? And even with advances in analytics, is the quality of surveillance relevant data in the banks good enough to support their effective use?

Surveillance –primarily a first-line activity?

The Front Office has always been accountable for running its business responsibly. Through its good conduct it generates solid, sustainable profits. In doing so, the Front Office assumes accountability, acting as the first line of defence for the institution and stopping potential issues at source.

However, historically, it is Compliance in the second line of defence that has held responsibility for surveillance. But why should this be the case when it is employees in the Front Office that are most likely to lose out? Does it not make more sense to place surveillance in the first line of defence?

It seems evident that those running the business (and who may be personally liable if things go wrong) should have control over surveillance, providing the information needed to take the right decisions at the right time. The regulatory direction of travel suggests this shift needs to happen. But are institutions on board? Do Front Office and Compliance agree on this? And, how will Compliance’s role transform to ensure the business is still policed?

Footnotes:

  1. http://www.bankofengland.co.uk/markets/Pages/fmreview.aspx#
  2. http://www.fca.org.uk/firms/being-regulated/enforcement/fines/2015
    http://www.fca.org.uk/firms/being-regulated/enforcement/fines/2014
    http://www.fca.org.uk/firms/being-regulated/enforcement/fines/2013

Contact us

Graham Ure

Financial Crime Technology Partner and Co Lead for Market Abuse & Surveillance, PwC United Kingdom

Tel: +44 (0) 7889 644 672

Rukshan Permal

Partner, PwC United Kingdom

Tel: +44 (0)7595 611533

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