Last week, it was reported that the UK bank, Standard Chartered, had agreed to pay a fine of $40m to the New York State Department of Financial Service (DFS). The reason for the eye-watering penalty was the use of chat rooms between 2007 and 2013 to rig the foreign exchange (FX). What is troubling is that at the start of 2019 and one-year on from MiFID II coming into force, many financial institutions are still struggling to get to grips with how to deal with electronic communications (eComms).
Clearly, $40m is no small sum, but with all of the adverse publicity that this story has attracted around the world, the true cost to the bank is likely to be far greater. What’s more, the eComms landscape has grown ever more complex since 2013 and it would not be bold to predict that Standard Chartered will not be the last to fall foul of the regulator.
In the press release issued by the DFS on 29th January it was stated that traders had used two chat rooms (widely reported by other sources to be called “Old Gits” and “Butter the Comedian”), as well as emails and other communications to improperly share confidential information and attempt to manipulate trades.To compound matters: “DFS’s investigation found that traders regularly ignored guidance from regulators, as well as guidance from the bank itself, that was designed to protect client confidentiality and to avoid situations involving trading on non-public information.”
So, the question that needs to be asked is: what can regulated financial institutions do to protect themselves from trader misconduct, intentional or otherwise? And, how can they assist the regulator should it have cause to open an investigation?
First there needs to be the recognition of where the ‘real’ activity happens during a day of trading. Traditionally and still today, most financial institutions focus most of their attention on recording and monitoring voice communications. It seems perfectly logical given the importance of the turret and telephone to trading floors for decades. However, we now live, work and trade in very different times and often the action now happens in the eComms channels, and they are growing every day.
Consider a scenario in which two traders are on the telephone talking about a stock price, the call ends with one saying: “Let’s take this offline”. What follows is a raft of communications taking place over
WhatsApp and several more via email, concluding with a transaction. The interactions may or may not have facilitated a manipulation of the stock price, or the disclosure of confidential information, however the regulator has cause for concern. A chain of events unfolds in which the bank must now locate and recreate every interaction and all within a set and challenging timeframe. This may be straightforward for voice calls but what about the eComms?
The vast majority of traders want to play by the book, but to do so they need to be aware of the rules of engagement. eComms provide financial institutions and the traders working for them with a wealth of opportunity to work smarter and faster. Conversely, it has also created a wealth of opportunity for the rogue traders. Implementing a compliance eCommsplatform that can actually monitor, analyse and create alerts with market and trade context rather than just record, is one of the single best ways for regulated institutions to help safeguard themselves from fines, that will almost certainly soon eclipse the $40m levied against Standard Chartered.