It’s your call when you need subject matter expertise to address issues and concerns in Risk Management, Controls, and Governance around trader conduct and trade surveillance.
RMCG = Risk Management, Controls, & Governance
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RMCG = Risk Management, Controls, & Governance 〰️
I provide expert consulting based on 30 years of capital markets industry and regulatory experience to address non-financial risk management focusing on trader conduct, trade surveillance, market abuse, and related operational risks. I will address regulatory expectation, trading venue inventory and order data issues, control coverage completeness, and trade surveillance effectiveness.
Improving Controls and Governance Effectiveness. Driving Enhanced Risk Management.
Market Conduct
and
Trade Surveillance
Risks are Increasing
OCC, Fed fine bank $136M for repeated risk management, data governance failures.
Bank admits to US market manipulation and agrees to pay $920m.
Bank former gold trader sentenced to 2 years for fraud, market manipulation.
Bank Ratings Show US Regulator’s Concern on Handling Risk
Half of biggest banks have subpar operational risk management.
Bank unit fined $24M in FINRA spoofing case.
Complex Forms of Markets Abuse on the Rise for US Banks.
Bank hit with $348m in fines related to its trade surveillance program.
Bank said it has fired or suspended traders from its markets business over allegations of inappropriate behavior and warned an investigation into the unit may have consequences on staff all the way up to the CEO.
Regulatory Scrutiny
Market Conduct Scrutiny will Continue
Global regulatory scrutiny is expected to increase related to trader market conduct. Expect increasing coordination between regulatory agencies. Governance effectiveness and appropriate management and supervision will likely be the near-term focus.
Common weaknesses in Trade Surveillance Controls
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Clear identification and evidence of surveillance coverage is required for all relevant trading activity, including cross venue and cross asset / product coverage.
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Fragmented or low-quality data, often pulled from disparate sources, leads to uncertainty or clear gaps in trade surveillance coverage.
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Reliance on legacy systems, often built for unrelated purposes, are incapable of handling current trading volumes or detecting sophisticated misconduct. Often manual processes persist where automation would improve efficiency and effectiveness.
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Governance structures often lack clear accountability and adequate subject matter expertise. Many banks continue to have a culture which makes challenge of 1LOD businesses difficult or unlikely.
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Surveillance systems often use poorly calibrated alert thresholds resulting in an over-burden of irrelevant alerts or missing misconduct. Parameters are not updated to reflect evolving market conditions or trading activity.
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Internal policies and procedures must clearly identify impermissible behaviors related to trading and market conduct and demonstrate complete coverage to all applicable laws, rules, and regulations.
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From board level risk appetite to individual trader limits, management must ensure that all risks are understood and managed appropriately. Risk acceptance is a formal process that requires specific risks to be identified, quantified, reported, escalated, and approved.
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Adequately control of market conduct risks require a clear and demonstrated culture that encourages effective challenge. Challenge must come from all lines of defense and control partners with the heaviest burden falling on 1LOD as an exercise of their subject matter expertise.
Expectation of management and supervision
Establish risk appetite for market misconduct, hopefully at zero. Managers and supervisors must support and enforce risk appetite.
Senior management must lead by example, enforce culture and conduct behavior, and ensure adequate and appropriate staffing across all capital market functions, including subject matter expertise.
Managers must lead by example, embody and enforce policies and culture, ensure risk governance and controls are effective in design and execution, and provide expert-based challenge.
Supervisors must be active and diligent in their understanding and involvement in the activities of their direct reports. Escalate all issues and concerns, enforce and drive culture and behavior norms, and be the eyes and ears of senior management. Their expertise in “how” trading is conducted is critical to the effectiveness of many controls.
Compliance officers and other control partners must have adequate organizational stature and authority to execute effective challenge to the lines of business activities and demonstrate appropriate subject matter expertise in the details of trading activity.
Active participation in market conduct controls and governance. Utilize markets subject matter expertise to address the challenges of running a surveillance program with similar complexities to the underlying trading systems, but for a hundredth of the budget.
Risk Management, Controls, & Governance
Focusing the interconnectedness between Risk Management, Controls, and Governance across the 3 lines of defense.
Governance encompasses the overall complex system or framework of processes, functions, structures, rules, laws and norms, interactions, power dynamics, and communication which sets the boundaries of acceptable conduct and practices. Governance controls decision-making processes and sets the overall direction of the group in order to effectively address its specific collective needs, problems and challenges.
Risk controls are part of the risk management process in which methods for eliminating or reducing risks are implemented. Controlled risks remain potential threats, but the probability of an associated incident or the consequences thereof has been significantly reduced.
Risk management is the identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.
Trade Surveillance
Trade surveillance is an automated process designed to evaluate all orders (GUI and API) for patterns consistent with impermissible trading behaviors or activity. This key set of controls must have evidence of effectiveness to demonstrate an adequate market conduct risk framework. In order to properly alert potential conduct risks, the trade surveillance program must address three primary components.
Surveillance Alert Disposition
Each automated trade surveillance alert must be evaluated and escalated as necessary. Subject matter expertise is required to differentiate between harmless and harmful order data patterns and to identify when additional investigation is needed.
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Data completeness must be thought of in terms of specific and necessary data attributes. Data attributes and formatting must be complete and accurate for all orders and able to be consumed by all trade surveillance tools. There must be reconciliation between orders and trading venues to ensure accuracy and completeness of both.
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Order and trade surveillance must effectively flag potential impermissible behaviors to support internal policies, laws, rules, and regulations. Management must ensure that the surveillance program provides a complete assessment of all impermissible behaviors across all venues, all assets, and all products. Cross venue, cross asset, and cross product surveillance is critically important and is the current hot spot for market misconduct.
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Surveillance of orders and trades must have appropriate, justifiable, and monitored parameters. These limitations on the controls must be used carefully and will attract regulatory scrutiny.
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A complete and updated trading venue inventory, with appropriated data attributes captured, has become a regulatory expectation. The inventory data is used to demonstrate surveillance coverage completeness.
I Can Help
With over 30 years of capital markets trading and regulatory experience at several large banks, I offer the energy, experience, and subject matter expertise to address your internal and regulatory issues related to market conduct and trade surveillance.
I Work closely with senior management, lines of business supervisors, second line of defense, and other control partners to pinpoint issues and drive improvement to governance & controls effectiveness, employee engagement, and effective challenge.
Evaluate and provide guidance on internal policy clarity and completeness
Evaluate and provide guidance on control performance and MIS reporting
Challenge and advise on governance routine performance and effectiveness
Evaluate and advise on the effectiveness of challenge across all lines of defense
Review and advise on internal and regulatory presentations
Provide a road map for controls and governance enhancements to strengthen the quality of risk management
I want to help.
Contact me to start a discussion and we will learn together if I can improve the results of your market conduct risk framework. Together we will enhance Risk Management, Controls, and Governance.