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Banks Seek Greater Insight Into Their Trading Activity

Banks are keen to adopt surveillance tools that will provide them with a greater understanding and insight into the trading activity within their institution, and the discussions that lead up to that activity, said panelists during FX Week’s trade monitoring and surveillance webinar.

The use and abuse of technology, particularly the extensive use of electronic communication, continues to feature front and center in cases that have been brought against banks for the manipulation of FX benchmark rates. More than $10 billion has been paid out in settlements so far, on both sides of the Atlantic.

But while technology made the actual rigging possible, that same technology, and the substantial trail of electronic messages, allowed regulators to build robust cases against banks for the manipulation of foreign exchange markets.

“The major players in the FX markets have been extremely responsive in the wake of what has really become a reputational risk, probably even more so than a regulatory set of risks to their business,” said Rob Metcalf, president at cognitive software company Digital Reasoning. “In the context of reputational risk, we see significant adoption and significant interest in figuring out what are the capabilities, technologies and tools that enable a sufficient level of coverage and understanding of electronic communication, email, chatrooms and transcriptions of phone  conversations.”

Eric Juzenas, principal adviser at the Commodity Futures Trading Commission noted that integrating this technology into the workflow of the business in an efficient and meaningful way remains a significant challenge. “I think we’ve solved the data issue and the technology involved in getting the data stored,” pointed out Aharon Haber, vice-president for product strategy at front-office optimization solutions provider TradAir. “The next big question is really building the right tools on top of that to give people the information they need.”

What is important, he explained, is how firms extract intelligence out of the information that has been gathered and gain an understanding of what is actually occurring within their  organization.

Some legacy surveillance systems that have been in place for some time generate such a large  number of alerts, said Metcalf, that some FX managers spend hours per day sifting through surveillance reports, often with little concrete results.

“The systems they have in place are not able to detect the type of behaviors that present the greatest risks – collusion, market abuse, market manipulation – so they know that they are missing things they know the tools aren’t able to detect,” he added. “The second problem is that they have an overwhelming number of alerts. So they either have lots of people or very valuable people spending lots of hours trying to review alerts that aren’t detecting the things they need to detect.”

The majority of these alerts are false positives triggered by parameters not properly calibrated for the activities of the organizations they call home. “[Our customers] are saying we’re not catching the things we need to, the stuff we’re looking at is not very helpful and it’s taking up a lot of time,” said Metcalf.