Fines soar for poor recordkeeping, bad data management and faulty trading controls

The cost of poor record-keeping and faulty data management continues to climb, as regulators in major jurisdictions issue multi-million-dollar fines to trading firms.

In August, the Securities and Exchange Commission (SEC) issued fines of more than a combined $390 million to 26 different firms for recordkeeping failures.^[1] The huge sum is more than four times the $81 million that was issued at the last investigation in February against 16 firms.^[2]

The SEC said that charges against the 26 broker-dealers and investment advisers were for “widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications”.^[3]

Regulatory focus

As we reported at the time,^[4] regulators are cracking down on lax data management and poor recordkeeping. The 26 firms in this case, some of which self-reported their violations, were mostly at fault for using unapproved communication channels - often messaging apps on personal devices.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said; “We remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets.”^[5]

“Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation.”^[6]

In May, the US Commodity Futures Trading Commission (CFTC) issued a single fine of $200 million to a major trade securities firm for failing to capture and survey billions of order messages over a seven-year period to 2021, due to misconfigured data feeds.^[7]

In the same month, the Financial Conduct Authority in the UK issued a multi-million pound fine against one company for failures in its trading systems and controls. The failure in controls allowed a single trader to make an error that led to “over a billion pounds of erroneous orders being executed and risked creating a disorderly market”.^[8] The same firm was also fined €12.9 million^[9] by the Federal Financial Supervisory Authority (BaFin) in Europe and £33.9 million^[10] by the UK’s Prudential Regulatory Authority (PRA) for the same incident.

Steve Smart, joint executive director of enforcement and market oversight at the FCA, said of the incident: “The FCA expects firms engaged in trading activities, including those using algorithmic trading, to have effective systems and controls in place to stop errors like this occurring.”^[11]

The FCA also banned a different trading firm in May, fining it £120,300, for two separate instances of providing incorrect information about clients’ accounts.^[12]

Surveillance is key

While somewhat different to the SEC’s recordkeeping fines, altogether the regulatory activity points to the need for trading firms to keep on top of data management, records and compliance.

New trade reporting requirements are coming in across several major jurisdictions this year. 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 will add to the weight of compliance obligations for trading firms.

Staying on top of reporting and compliance requires effective surveillance systems, fed by quality, consistent and harmonised data. Third-party specialists can help to provide top-notch data surveillance software, but firms also need to keep their surveillance processes up-to-date and ensure risk management and controls are working seamlessly with data management. Only systems that are capable of processing vast amounts of data in real-time 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.

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