When the FCA banned ex-UBS trader Arif Hussein for inappropriately messaging colleagues regarding the manipulation of rate submissions, the industry was understandably focused on how they could avoid such exposure and future potential risk. A combination of withdrawal from submissions, where possible, and beefed-up procedures followed. The regulatory community focused on replacing flawed benchmarks, and compliance heads worried about how much increased monitoring would be required of them, even with limited tools, constrained budgets and over-worked staff. Furthermore, the rules were not particularly clear or detailed: how much was enough surveillance? Which tools were best, what lexicons should be used, who should be covered and how often should they be surveilled?
Five years on from the original offences, have firms identified and implemented appropriate tools? Do senior management understand and appreciate that manipulation and abuse of markets by their trading staff may result in regulatory action being taken against them?
Perversely, perhaps one could argue that Mifid II and MAR provide helpful clarity in this area. Among their many requirements, stipulations regarding the recording of all trade-related interactions across all asset classes may be a boon. Even the simplest FX transaction may involve several conversations in the lead up to, and execution of the trade. The availability of more mobile, sophisticated communications technology only serves to enlarge the amount of related data that needs to be tracked through the entire lifecycle of a trade, from execution to settlement.
This requires collecting all communications sources and, most crucially, capturing the context behind any conversation. The potential for fraud does not just exist in one isolated Bloomberg chat, but also in the commands and operations that initiate those conversations. Today, incriminating clues and evidence are scattered among a whole different dialogue between traders and across numerous channels. From classic slang like “cables” and “Bill and Bens” to emerging terms like “hodl” and “satoshi”, a huge amount of jargon is used between traders, which has made it much harder for compliance teams to differentiate between the innocent and the suspicious.
But it is not just messenger channels where these conversations are taking place. Voice communications are an avenue that’s typically perceived as the most vulnerable for monitoring potential violations. Those intent on manipulating rates and/or markets know full-well that systems for tracking voice are less effective. They can switch languages or use different intonations to obscure their intentions. While more voice conversations are now being monitored, specific analysis into what was said is rarely performed. Firms have faced clear limits on the range and effectiveness of tools they can use for this work. Most banks still only carry out random voice recorded samples to look out for bad behaviour. Some only sample as little as 15 minutes of audio per day.
Since traders are more sophisticated with their use of language in masking suspect conversations across channels beyond Bloomberg chat, how does a bank ensure that no stone is left unturned in a post-Libor world? The answer may lie in working out a way that doesn’t tackle communications in isolation, but actually puts each interaction into context and most importantly, considers all other information surrounding a trade. Technologies like proactive trade reconstruction now automate the identification and analysis of every communication referring to every trade, eradicating information silos.
This analysis, for example, could include important intel such as how a certain price was reached, and how a firm measured the liquidity profile of a trade. Other intricate details, including how long an employee has been trading for, and in each of the different trading channels also should be factored in.
If this wasn’t enough, banks also need to make sure they have a clear window into their trader´s activity. Only then will banks be able to ensure the incident or intent of a conversation is supported by a specific behavioural change. As a case in point, it may well be that a trader is consistently using an untoward phrase over messenger with a colleague. Without the context around these interactions, banks won´t know the significance of the communication.
While much has been done to increase the surveillance of chat since the Libor scandal, there is no getting away from the fact that conversations have become significantly more convoluted since Hussein’s conviction. There will be more investigations, more penalties, more scandals. And now the FCA and other regulators have tools to take action against not only perpetrators but also management – at all levels. Has your firm done enough? Do you cover all communication channels? Is the front office involved in surveillance? Can you demonstrate the actions taken when suspicions are raised? There is zero tolerance from regulators, and, frankly, zero excuse for not having the appropriate tools.
If your firm has not invested in technology solutions since the Libor scandal you won’t have done enough. Senior management has the responsibility to ensure that sufficient investment has been made. It will cost money but the risk has to be covered. Otherwise you expose yourself and your firm to detrimental headlines and, like Arif Hussein, being banned from the industry. For life.
Nick Child is the former Markets compliance officer and chairman of the Fonetic Product Advisory Board