Effective Surveillance Systems

Under surveillance

Multi-million-dollar fines are the outcome for firms found to be violating trade surveillance rules and as regulators make robust recordkeeping and data management a priority, OTC market players need to do the same. Poor recordkeeping can be an expensive business. In February 2024 alone, the US Securities and Exchange Commission (SEC) handed out a total of US$81 million in fines to 16 firms comprising broker-dealers and advisers for “for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications”.^[1] In the same month, FINRA, a self-regulatory government-authorised not-for-profit organisation that oversees US broker-dealers, hit a major US investment bank with a US$ 512,000 penalty for “gaps in its surveillance reports” which meant the bank “could not perform reasonable supervisory reviews of trading activity in warrants, rights, units, and certain over the counter (OTC) equity securities for potential manipulation”.² These considerable financial punishments send a clear message to the sector that data management and recordkeeping is of paramount importance to the regulators.

And as 2024 heralds new trade reporting requirements across several major jurisdictions – including the Unique Product Identifier (UPI) to provide a globally consistent product taxonomy; the Unique Transaction identifier (UTI) which requires common transaction identifiers across reporting regimes; the Critical Data Elements (CDE) to provide internationally harmonised data fields and definitions, and ISO 20022 XML messaging standards for reporting to trade repositories – market players can expect even more scrutiny.

Improving surveillance

Alongside paying out significant fines, the firms punished by the SEC also agreed to retain independent compliance consultants to “among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures[SG1] ”.³

Meanwhile, the bank fined by FINRA has since added the missing securities to the surveillance reports either in response to regulator’s investigation or through the firm’s adoption of new surveillance repor[SG2] ts.⁴

While appointing third-party specialists and moving to new surveillance processes to help identify data and recordkeeping failures may have come a little too late for these institutions, other OTC market players can avoid falling foul of the regulators by getting surveillance systems up to speed.

Effective surveillance systems rely on quality, consistent and harmonised data. Collaboration is key to improving security, and market participants need to share data with one another, and with regulators, to identify potential violations more efficiently and mitigate market abuse.

This means employing systems that are capable of processing vast amounts of data in real-time, and that can identify patterns and detect potential violations more accurately.

Access to data

Parameta Solutions, the data and analytics division of TP ICAP Group, the world’s largest inter-dealer broker, has unparalleled access to data to support compliance professionals.

We offer visibility into bid and ask prices, full order lifecycle, trade volumes and transaction details which can support clients' risk assessment and market abuse monitoring requirements.

Our data is collated across TP ICAP venues into a curated and normalised feed, with industry-standard taxonomy and nomenclature. Raw order and trade data is further enriched to give deeper insights into the activity and nature of OTC markets.

The curated data can be integrated with incumbent compliance and surveillance systems providing timely and consistent data that adheres to the regulatory regimes across the globe.

It is clear that no institution is immune from the wrath of the regulator where violations occur, but likelihood of violations can be reduced with the right systems in place.

To find out more…

¹ SEC.gov | Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures

² 2019063499505 Goldman Sachs & Co. LLC CRD 361 AWC lp.pdf (finra.org)

³ SEC.gov | Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures

⁴ 2019063499505 Goldman Sachs & Co. LLC CRD 361 AWC lp.pdf (finra.org)

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