Travis Schwab, CEO, Eventus.
Over the past year, global regulators have hit firms with massive fines for lapses in data governance. This has triggered a state of near-panic across trade surveillance teams as they scramble to avoid a similar fate. In fact, there has been little time for much else. As one head of surveillance at a European Global Systemically Important Bank (G-SIB) commented in a recent industry report from 1LoD: “When was the last time we talked about market abuse. I’ve spent the last year talking about data.”
Consequently, ensuring data from all venues, assets and products traded makes its way into surveillance systems is undoubtedly one of the most pressing priorities for firms right now – but worries stem from the fact that this is far easier said than done.
Shepherding data from across the business should be relatively straightforward in principle, but internal siloes, fragmented systems and manual processes present significant obstacles. Issues are compounded by the fact that surveillance teams generally do not own the upstream data pipeline, leaving them reliant on other teams or areas of the business. The seeming “perfectionism” demanded by regulators has also seen some surveillance teams faced with trying to prove what they don’t know and document what doesn’t exist.
Despite these challenges, the good news is that many firms have made progress over the past year – particularly in instigating top-down data reform and starting to get their venue inventory under control. And while trade surveillance teams cannot solve the problem single-handedly, they can clearly signal to regulators they are taking the issue seriously. Starting to fill the gaps by putting controls in place to better understand upstream flows and more effectively track the completeness, accuracy and timeliness of the data feeding their systems is an immediate step that can be taken.
For example, record reconciliation of data feeds compares upstream feeds with surveillance feeds to confirm matches. Anomaly detection alerts identify if fields or the number of messages have changed significantly from the previous day. Another simple measure is to track the number of alerts per procedure to identify data feed issues – if a procedure usually averages 50 alerts per day and then produces zero, there is likely to be a data feed problem.
The Need for Future-State Surveillance
While these measures are important for calming nerves in the short-term, the recent enforcement actions reveal a more fundamental shift that is propelling trade surveillance into a new era. The 1LoD report highlights how “trade surveillance has evolved beyond just meeting regulatory checklists – it’s a fundamental test of data integrity that demands a re-engineering of entire data management and governance frameworks.”
A broader focus not just on whether market abuse occurs, but whether firms’ internal processes and surveillance capabilities are sufficiently robust, demands a new approach. Practically speaking, any regulatory inquiry will now start with the question – “How do you capture the data you need?” And as an increasing number of firms have found out, not having a good answer is no longer an option.
Rather than prompting panic, this should trigger a clear-eyed assessment of whether existing surveillance systems are fit for purpose. Firms must know what data they are working with and have the ability to easily demonstrate to regulators what they are doing with it.
Moreover, the scrutiny is only going to increase, meaning surveillance teams must have both the foresight and flexibility to add new data controls, procedures and parameters to anticipate and address new requirements as they emerge. The ability to block out excess noise through automation and precise calibration is also crucial to ensuring critical gaps are not overlooked.
Given the massive stakes involved, cool heads must prevail. If an existing surveillance system doesn’t deliver on this need for transparency, flexibility and customization, it’s time for a change.
Is this daunting? Not with the right partner. And it’s certainly less daunting than getting hit with a nine-figure fine. The industry has already seen a welcome shift away from monolithic, legacy systems, but this must continue to accelerate to meet stringent new requirements.
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