This article is by David Cutler, Chris McDonald and Gary Stone.
Many sell-side firms were surprised to see that record-keeping for essential books and records – or ‘write once, read many (WORM) storage’ – continued to be among the top priorities on FINRA’s agenda for reviews in 2016. While regulations requiring financial services firms to maintain records in a non-rewriteable, non-erasable format have been in place since the ‘90s, many sell-side institutions have yet to successfully adopt a comprehensive firm-wide solution.
When you consider that these firms can employ as many as 40 order management systems – versus around five for their buy-side counterparts – the lack of a compliance platform with a WORM-compliant infrastructure can create an environment in which compliance and risk management personnel constantly feel like they are playing defense with no chance of catching up to the speed of the markets.
These trade archiving requirements dictate the need for effective record-keeping across all your trading platforms. But what you are able to get out of your compliance system doesn’t have to be limited to data for your compliance function. A top-notch compliance program can also benefit your operations as a whole, including:
(1) Operational Analytics
Best execution data only goes so far. Imagine the value that could be gleaned from being able to run historical analyses of your firm’s best and worst trades with the added benefit of understanding what information sources traders accessed prior to completing each transaction. You could discern who and what traders are interacting with when a successful trade occurs. Similarly, when a trade does not perform well, you could figure out where the information that led to the initiation of the trade came from and monitor that source more closely to determine its reliability and usefulness to your firm.
Your analytics also tell you which of your clients have embedded alpha, in other words, these clients are consistently the inquiry that occurs prior to other clients. The Volcker Rule allows you to position in anticipation of future client demand without ultimately running the risk of front running because you don’t know with any certainty that the demand will materialize.
At the global level, this exercise can enable you to understand whether a client is right for your firm long term and whether losses incurred on a regional basis are ultimately negligible. Maybe Asia loses money on this client, but you need Asia to keep losing money because the client is a major revenue generator in the EU.
(2) Insurance Policy
More and more buy-side firms want the sell-side counterparties with which they do business to insure against market abuse. At the core of every effective market abuse surveillance program is an automated trade surveillance system underpinned by a comprehensive record-keeping and compliance platform. Buy-side companies know that if your firm is proactively monitoring all trading activities, the risks of doing business are reduced dramatically. Additionally, by maintaining your trade archives over time, you protect your firm from the potential for future legal action or from fielding a question you can’t answer about your operational track record.
(3) Objective and Systematic vs. Ad Hoc and Manual
Perhaps the most fundamental benefit to the business of building an effective trade surveillance program is that your firm’s compliance and risk management functions will shift from being process-oriented to principle-driven. It’s common to see firms over-staff their compliance departments due to an overreliance on manual data analysis and archiving techniques. Rather than leveraging technology to aid in the data collection and analysis, a lot of firms make the costly mistake of using humans to analyze it instead. Trade archiving, data discovery, and improved trade surveillance technology today enables you to use technology to shave hundreds, if not thousands, of hours off your team’s front-end data collection efforts. These are hours that could instead be used to focus on analyzing data and viewing trades through the unique lens of your business goals and regulations.
(4) Consistent and Trusted Data
Regulators know that a rock-solid record-keeping solution enhances compliance readiness and the workflow by enabling clients to be reasonably sure that the best execution and other metrics that they are also obligated to calculate are based off of consistent, reliable, and accurate data (on WORM storage). That’s where brokers are getting their butts handed to them – inconsistency of the data is leading to massive fines and has likely been the single greatest motivating factor for the FINRA compliance examinations. The rest of the world isn’t far behind.
MiFID II is one of the reasons WORM continues to be a hot topic for compliance professionals, as the EU regulation requires that by 2018 financial services firms have records stored in a durable medium that allows them to service information and data requests within 72 hours. But the usefulness of record-keeping and trade surveillance is just as valuable for U.S. and other non-EU sell-side businesses.
Consider how your trade archive program is benefiting your bottom line and where there may be room for a new solution that not only improves your compliance function, but provides value to your business operations overall.
On July 14th, Bloomberg Vault will participate in a complimentary webinar for sell-side professionals: Communication Surveillance: From e-comms to trade data learn what peers are doing for supervision and surveillance. Register online.