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David Woolcock 04-Aug-2014 13:21:00 5 min read

Implementing Compliant Trading

The Implications of Fair and Transparent Dealings with Clients in a Self-Regulating Marketing - and how to be Compliant Now and in the Future

We're now in an intense period of implementation for regulators, and firms will need to adapt their business models to meet regulators' and policymakers' expectations and, importantly, put customers at the heart of their businesses. Implementation and adaptation inevitably carry risks, which we all need to be alive to. - David Lawton, Director of Markets, FCA: Economist Bellwether Conference, May 2014

With market regulators investigating a broad sweep of allegations of misconduct in the markets many banks are re-assessing how they can fulfil their commitments to having senior management ensuring that policies are in place so that business is conducted within the framework of applicable professional and ethical standards, laws, regulations and internal policies. When sales traders negotiate deals and complete deal tickets (the source document for all ensuing procedures) it is important to effect real-time trade capture to front office systems via Straight Through Processing (STP) techniques. This should be coupled with audit trails being available as to how the price was sourced, what mark ups (for Capital, Risk, Credit, Sales etc.) were applied and a timestamp at the exact point of execution the deal was traded at with the bank. The correspondent market price at that timestamp should also be available in the audit trail. For voice executed deals, the timestamp should be associated with the relevant recorded conversation and ideally the deal ticket should have a link to the recording. It is also vital that a real-time credit check was performed that ensured the deal complied with limits allocated independently of dealing management, and that if a breach was sanctioned an audit trail is available showing how the approval was given.

The single point of failure in this is the telephone! Voice trading is the banks key vulnerability as apart from the tape no means exists to monitor trader behaviour and no record exists of the actual market price at the time or of the margin/margins taken by the bank. The Department of Justice has already begun probes into how sales traders price deals to customers both generally and in relation to some identified bad practices in which banks have inflated the profit they make on customer deals by not aligning the execution on discretionary trades with the cover trade. This has allowed for the bank increasing the profit on the trade to the disadvantage of the customer and is thus extremely bad practice and in many jurisdictions illegal activity. Banks need to ensure more emphasis is placed on the “voice” and “eyes”. In other words, the means of controlling visibility of specific activities and ensuring the right people, with the right skills are undertaking or checking deals and handling exceptions, are appropriately informed in performing this oversight. Ideally this will be conducted both in real-time and post event through audit trails as it would enable immediate corrective action to be taken and would satisfy any regulator inspections.

In response to this senior bankers are aiming to minimise human intervention because traditional trading over the phone has come under an intense regulatory spotlight. Authorities around the globe are investigating alleged manipulation of benchmarks such as currency fixes and interbank lending rates. However for many clients voice trading is their preferred execution method and banks need to be able to offer this important service in a compliant way that adheres to best practices and follows current and future regulation especially that encompassed in the MiFID2 review. The duty of care banks owe to their clients is increasing with the light touch approach to the duty of care offered to professional clients; as opposed to retail customers where regulation required a higher duty of care; is soon to be a thing of the past with all clients being subject to the higher standard. The wider regulatory policies also seek to improve the underlying risk-management capabilities of banks, whether looking at Legal, Operational, Market, Regulatory or Credit Risks. Managing operational/conduct risk of trading and sales is now bang square in the middle of the regulators sights and the cost of failure carries significant regulatory, financial and reputational consequences. So how can we at Eurobase help you mitigate the risks associated with all styles of execution with a full click by click audit trail and comprehensive reporting suite?


David Woolcock

David Woolcock is an independent consultant and Director, Business Consulting at Eurobase. In addition, David is Chair of the Committee for Professionalism at ACI – The Financial Markets Association as well as Vice-Chairing the ACI FX Committee. He is also a member of the Market Practitioners Group for the Bank of International Settlement's FXWG that wrote the FX Global Code.