Preparing for MiFID II

Simon _RichardsIn conversation with Simon Richards, CEO USA, Fonetic, explaining how the right compliance technology can save banks billions of dollars even before regulations kick in.


Q: Can you please briefly summarise the context in which we are having this discussion?

Simon Richards: The European Commission’s proposal to allow a year’s extension on the deadline for MiFID II compliance means that implementation of the directive has been delayed until January, 2018. While many industry participants might heave a sigh of relief that they have been given more time to implement the major IT operational changes required, such as transaction reporting and pre- and post-trade transparency, the fact remains that the changes to these dates make one thing abundantly clear: in order to keep pace with the rate of change and ensure never being caught on the hop, the clever money will look to become more strategic in its response and move away from short-term tactics.

The MiFID II revisions in autumn 2015, the uncertainty around when the changes would come into play and the Dodd Frank Title VII reforms, together with the current uncertainty around Brexit,  reflect the fact that regulations are going to be regularly reviewed and are likely to change often and rapidly with implementation dates moved back, or even forward if necessary. Banks and trading firms need to be prepared for regulatory change at the point of announcement because if they are compliance-ready ahead of time, then they will be able to manoeuvre and adapt in order to stay live in the market.

Q: But you argue that being compliance-ready is not the end of the story, don’t you?

Simon Richards: Correct. The technology systems that help ensure transparency and transaction reporting are not cheap so there must be clear return on investment that kicks in long before the compliance regulators come knocking on the door. The benefit of knowing your bank is compliant and will never be hit with multi-billion dollar fines speaks for itself but while waiting for the regulations to become official, money can be made out of the right kind of compliance technology.

Q: Is it possible to put a credible figure on the amounts that could be involved?

Simon Richards: Not as such, but since the Libor scandal and Dodd Frank Title VII and MiFID II reforms, banks rightly feel a sense of urgency and want to avoid huge fines. With the stakes so high, it is definitely worth trying to unmask the fraudsters but this is a costly undertaking in itself. Most fraud takes place over the phone but banks and trading firms are essentially blind when it comes to surveillance of voice. Vast amounts are spent on the recording and screening of calls, usually by outsourced employees, and an equally huge number of false positives are thrown up. But without an overarching holistic view of all communications including voice, text, email, chat and social media, for the front, middle and back office, it is virtually impossible to work out if an alert actually warrants investigation.

Q: Would you say there is more to the argument than just money?

Simon Richards: Absolutely. The amount wasted in terms of money, time and effort so that false positives can be manually sorted from the real alerts is undisclosed, but in May 2015 the Financial Times reported that a large US investment bank had used unskilled people to screen emails at a rate of 200 messages a day; that figure is surely only the tip of the iceberg. With phone surveillance, all investigators have to go on is the date of the call and the name of the trader who is assigned to that phone. But without biometric technology, how can anyone be sure that a fraudulent trader won’t make a dodgy call from a colleague’s phone during the lunch hour?

Q: Can you sketch out you think is required to tackle the issue?

Simon Richards: What is needed is the ability to reconstruct the whole of the communication trail surrounding a trade from very beginning to end including the call, emails, text, and any other communications that relate to it. Only then will surveillance officers be able to sort the false positives from the actual fraud alerts. The best tech solution will be one that has a richness of functionality and analytics, including context of voice content capability and, to be really first class, it should be able to detect and report true anomalies early – the benchmark is within 15 minutes.

Q: Pardon the cliché, but are we talking about evolution or revolution?

Simon Richards: A combination of both. Banks and trading firms that have instant access to accurate automatic trade reconstruction also have a solution for the management of the P&L trading desk. It is what the industry has been crying out for – imagine the scene: a fast-moving trading floor where a trade booked for $10 million is tallied against the actual trade (completed on the phone or by chat) which is booked at $100 million – it is a scenario that is often not detected until reconciliation when the damage is done and the chance for remedial action lost.

Because markets can move so fast, the consequences of mismatched trades can be costly. In the time it takes to identify and then unravel the mistake – typically over two weeks – markets can move a lot and this is when the millions of dollars can be lost because the correct trade must be booked at the trading price. The bank or firm that made the mistake is likely to make a loss, and the impact on their trading book causes a ripple effect that goes way beyond the original mismatched trade.

The mitigation of mismatched trades through their fast and early detection should be the holy grail of the P&L desk and managers need a technology solution that can accurately reconstruct entire trade communications before market movement drives greater losses. Because most fraud happens over the phone, the technology must be able to analyse the context of the voice content so that it is possible to establish accurate meanings right from the start of the data-gathering process.

This takes more than an understanding of trading vernacular. A relational picture must be built up over time that allows the analysis of all the types of communications put together as well as the people involved. Only then will context anomalies show up. However, this level of insight is not possible from speech-to-text or phonetic technologies. It requires direct phrase recognition ability that is able to monitor, capture and understand what is said in every voice recording, email, chat and IM so that it is possible to understand what is really happening on trading floors in all languages to a very high level of accuracy.

Q: Any handy tips on what the industry needs to do?

Simon Richards: Of course. More than ever the financial community needs a technology partner it can rely on; one that helps to eliminate wasted time, unnecessary errors, misdirected effort and not least, money lost through mismatched trades and regulatory fines. When choosing an automatic trade reconstruction technology partner, banks and trading firms should look for a solution that is able to accurately measure trading risk by fully analysing all communications that reveal trading behaviours. This then enables them to understand what is really happening on their trading floors in all languages and they can then use this information to manage risk and, as a prerequisite, meet all of the regulators’ requirements. The smart money arms itself defensively by seeking a technology partner that can enable it to properly manage risk, providing peace of mind and freeing it to get on with trading.