Blog: Global Regulation on Record-Keeping and Trade Reconstruction is Being Widely Ignored in Relation to Social Media
1st August, 2016
Last week one of GreenKey’s advisory board members, Jill Sommers, a former CTFC Commissioner, wrote a blog about record-keeping requirements. Her punchline:
One of the challenges that market participants face, both senior managers within regulated firms and the regulators themselves, is how to capture, store, analyze and retrieve the vast quantities of data that are produced from daily communications. While banks have lived with record-keeping and trade-reconstruction requirements for many years, they have not yet come to grips with the rise of social media such as WeChat and WhatsApp. On the buy-side, these regulations are a whole new ballgame for hedge funds and asset managers.
All major global regulators have “record keeping” requirements. For example, the CFTC’s rule 1.35 requires the retention of voice, email and instant messaging (IM) communication in a form and manner identifiable and searchable by transaction. Similarly, the SEC’s regulation 17a-4 deals with the electronic storage of broker-dealer records. In the UK the SYSC requirement is that “reasonable records” must be kept and maintained in way that is capable of reproduction “in the English language on paper”. Trade reconstruction is the requirement to be able to pull together on demand all records related to a trade whether electronic, voice or paper. These regulations are critically important as failure to comply with them fundamentally undermines the ability of managers and firms – and in turn, regulators – to deter, detect and prevent non-compliant behavior.
Recent investigations such as in regards to the manipulation of LIBOR and of FX have highlighted the importance of being able to monitor daily communications. For LIBOR the market manipulation was carried out by senior managers sending emails and IMs to their rate-setting traders instructing what the appropriate LIBOR rate should be. At the center of the FX investigation were the transcripts of the electronic chatrooms which senior currency traders used to communicate, along with the associated IM systems.
As a consequence of the explosion in the use of social media during the last 5 years, the record-keeping challenge facing regulated firms is becoming more acute. Despite a general prohibition of the use of non-compliant IMs for commercial purposes, it is common knowledge that tens of thousands of traders in the global energy markets use Yahoo Messenger to communicate, including obtaining quotes and doing trades. Similarly, all over Asia it is common practice in the financial markets for people to communicate quotes, solicitations, bids, offers and instructions on social media platforms such as WeChat and WhatsApp. There are no means whereby firms can store or retrieve such messages, and in fact users can actually delete them. This makes it impossible for senior managers to exert appropriate oversight or meet regulatory record-keeping expectations thus exposing firms and individuals to a very significant risk of regulatory censure.
At GreenKey, we have powerful tools to help make the financial markets safer, more effective and efficient for everyone. Our tools can easily plug in to existing tech stacks to plug gaps and fill holes in compliance needs and we have a rich set of APIs for integration into other services such as analytics and behavior profiling.
These include simple and cost effective solutions for some of the record-keeping and trade reconstruction challenges, including:
- High quality recordings: Today, most recordings are inaudible, or low quality at best and any quote or transaction is buried among hundreds of hours of MP3 recordings. This makes it extremely cumbersome and expensive for regulators to sift through files for a specific quote or trade and for compliance officers to do so in response to a regulatory inquiry. If the information is not readily searchable by transaction, and/or of poor quality so that it is not a reasonable record – it is in violation of the record-keeping requirements. Firms should adopt better technologies (such as those offered by GreenKey) to ensure high quality recordings that are in fact audible and that allow for time stamping of specific events, such as a quote or trade. We provide all the call metadata in the same screen as the actual recordings, to facilitate far greater navigability.
- Transcription: Search technology for text is far superior to that for voice. Using cutting edge and domain-specific automatic speech recognition (ASR), conversations can be very accurately transcribed into usable text data in real-time, enabling search and analytics. Transcribing voice into text allows compliance officers and regulators to more easily search through and make sense of this data. Transcribing voice recordings into text will enable firms to leverage the data into integrated risk and trading systems, potentially providing a source of revenue or alpha.
- Keywords: Quotes and trades can be extracted as keywords from conversations using ASR, and the recordings can be tagged to a particular transaction so that it isn’t necessary to sift through thousands of hours of recordings.
- IM capture: Messages sent over IM platforms without retention features (such as Yahoo, WeChat WhatsApp and AOL) can be captured and stored.
The data produced from daily communications is exploding, and we need new tools to ensure that record-keeping is robust and effective and that trade reconstruction is easily achievable.
GreenKey is working tirelessly to help our clients comply.
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