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Surveillance 2.0 – Turn Up the Signal, Wipe Out the Noise

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By Joseph Schifano, Global Head of Regulatory Affairs, Eventus Systems.

Trade surveillance is a complex discipline, dependent on the processing and filtering of masses of data. Its mandate is constantly increasing too, with the relentless iterations of regulatory and market change demanding the monitoring of more asset classes across more business lines and against an expectation of greater results. Add to this the need to accommodate unexpected events like Brexit or Covid, and the need for breadth and agility begins to outstrip the capabilities of the current generation of solutions. Lastly, it is hard to predict today what regulators might consider problematic in a few years. Legacy surveillance models overly rely on constant calibration by looking at today’s enforcement cases that reference activity from years ago.

By leveraging technology advancements in automation and machine learning, and a clean-sheet approach to deployment and service, firms can achieve the necessary efficiency, scale and flexibility to meet today’s demands and those of the future – placing the control, without additional burden, back into the hands of the monitoring team as they look forward to the challenges to come.

Market Abuse Regulation – a decade of regulatory change.

Post-MiFID, and with the advent of MAR, many market participants were introduced to the requirement of systematic market abuse monitoring for the first time. This applied to the increasingly fragmented world of equities first, then quickly encompassed other asset classes. This was further complicated by an ever-changing market structure of dark and lit liquidity.

Market participants and exchanges using legacy surveillance platforms needed to act to meet the new regulatory challenges. Internally, market participants needed to update data warehouses (while also managing new cloud technologies, cyber security issues, etc.). Further, these surveillance platforms pre-date the fragmentation of MiFID II and the cross-asset requirements of MAR and required significant re-engineering to support the changing market structure and rules.

For many market participants seeking surveillance platforms, these legacy platforms were simply too expensive and complex to adopt, spawning a number of more affordable first-generation platforms, which met some requirements, but in many cases failed to lessen the operational overhead associated with setting up alerts and fine-tuning false positives.

In parallel, compliance professionals faced the additional need to monitor and report on similar electronic trading controls and governance – RTS 6, RTS 27/28 and Best Execution/TCA to name a few – for which overlapping analytics were collected, analysed and systems put in place to address a plethora of associated regulations.

Wind the clock forward and the result is a patchwork of legacy systems and services, requiring governance and maintenance on a regular basis, compounding the daily workload of case reviews and reports, and piling pressure on the already stretched compliance and risk teams and resources.

With the FCA’s increasing expectation of monitoring effectiveness, clearly articulated through Thematic Reviews and Market Watches and increased scrutiny over the whole operational risk area, the responsibility to ensure adequate people and systems are in place sits directly with the senior management team whose accountability is formalised through the SM&CR.

Optimise and move on

Taking the lead from advancements in high frequency and algorithmic technology developments, Eventus is transforming the risk and surveillance space.

This new breed of platform will deliver smarter, more actionable alerts, enabling complete detection across all scenarios. Here at Eventus, our flagship Validus platform uses robotic automation processing and machine learning to cast a wide net for problematic behaviour and automatically escalate the most actionable alerts to the surveillance teams.

For the typical user, drag and drop simplicity at the front-end easily allows customisable surveillance tools, and for the power user, native python integration also unleashes the full under-the-bonnet extent of the platform’s algorithmic heritage.

Tools to support ongoing change management are available as a turnkey solution, enabling simpler deployment and reducing the time-to-implementation as well as the day-to-day overhead of scenario management.

Normalized data across all risk and compliance operations reduces duplication of effort, and takes on board the FCA’s steer on firms’ approach to risk assessments, practices and procedures to lower risk, outlined in FCA’s  Market Watch 63. For this, Validus’s ongoing system optimisations are audited and feed empirical evidence into annual assessments.  Pulling the same data into operational risk views allows for tangential operations to leverage the same platform, enabling RTS 6 governance and RTS 28 reports to be generated from the same underlying system.

The ability to cope with increasingly complex market data is important, too. The platform naturally scales to handle extreme volumes, not only necessary to support the rates of today’s electronic markets, but also looking ahead to the new worlds of institutional digital and crypto assets. At its core is a cutting-edge statistical engine, used for anomaly detection, enabling new algorithms to be added instantly and easily. The result is that market participants no longer need to rely on static out-of-the-box alerts when confronted with a constantly changing environment.

Indeed, the need to react quickly to a changing world has become a priority. For example, the pandemic introduces challenges as staff work from home. The FCA’s Market Watch 63, published in May 2020, provided guidance on ‘Market conduct in the context of the coronavirus’. In addition, regulatory divergence by the UK, caused by the onshoring of the EU Market Abuse Regime after Brexit, required quick amendments to surveillance models. For example, one regulatory divergence led to a differing approach to SME insider lists compared to the rest of Europe. Legacy platforms don’t have the requisite flexibility for firms to quickly tailor to the new requirements. Flexibility and self-control are key to ensuring these rapidly changing rules are provisioned properly and quickly in the monitoring platform.

The true difference to the user, though, is the partnership of this new tech with exemplary client service. For too long, first generation system providers have proved unresponsive on both counts leaving users marooned between the barrage of inbound regulatory changes and the inflexibility and unresponsiveness of their technology partners.

Building for the future

This isn’t about plugging machine learning into an already stressed technology stack. Next generation means significant change. The market requires a fundamental shift in technology to address the cadence and scale of current and future regulatory advancement.

And to meet the requirements of all sizes of firms, the answer must be simple, high performance and future-proof. The next generation of platforms reduce risk and ease operational overheads, enabling even the smallest compliance department to deliver more with the same.

By leveraging smarter technology, market participants can achieve higher detection rates with less distraction, and going forward, they can turn up the signal, and wipe out the noise.

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