FX monitoring systems remain in infancy
FX monitoring and surveillance solutions have been beefed up since the fixing scandal broke, but inconsistencies persist in the way in which they are applied and, more generally, new systems lack a harmonized and automated approach.
One of the Financial Conduct Authority’s key observations when it announced the fines for banks found to have failed to control business practices in their G10 spot FX trading operations was that ‘monitoring was not designed to identify the behaviours’ found in its investigation.
Paul Graham, head of compliance at ADS Securities, refers to an explosion in demand for turnkey solutions and says even in firms where the solutions might have not changed, they are now more rigorously applied and implemented.
Wolfgang Fabisch, co-founder and CEO of risk-software solutions provider b-next group, says solutions have become more sophisticated and standardized, and that voice analytics has become more important as a means of recording and analysing verbal submission patterns. However, analysts say there still doesn’t appear to be a harmonized or automated approach in how monitoring tools are deployed.
Alex Viall, Behavox’s head of regulatory intelligence, says market participants have had to adopt a siloed approach to run separate applications across trade data, text-based communications channels and voice communications.
“These applications have little if any correlation as they analyse these data sets individually,” says Viall. “It is very difficult, if not impossible – unless you stumble on instances by luck or random testing – to identify market manipulation within a single call or chat. Identifying a nefarious pattern of behaviour is also close to impossible.”
According to Viall, the targeted trade surveillance and focus on specific FX manipulation scenarios that has occurred since the fixing scandal still lacks any kind of aggregation of analysis that would better identify any recurrence.
“The reality is that the banks have increased their commitment to surveillance of these areas, but the technology has not yet changed to help them,” he suggests.
“This means they are doing more manual surveillance and random testing to try to appease regulators, which is expensive and ineffective – especially at global investment banks with huge trading teams and petabytes of data to analyse.”
The fixing scandal has highlighted the lack of monitoring in FX when compared with other asset classes such as equities or commodities, adds Amarjit Randhawa, solution engineering manager at Corvil.
“Those asset classes started with a DIY approach, but soon realised this was not good enough,” he says. “It seems likes FX is walking down the same well-trodden path.”
Although FX market makers have clever engineers, they are not experts in monitoring, which causes a huge problem in that the monitoring solution is always one step behind as problem detection is built after a problem is seen, continues Randhawa.
“Eventually, customers realise they need an independent, real-time view of their systems, one that is able to auto-detect and alert against a whole host of problems seen across many FX environments,” he says.
“You can liken this to antivirus software in that once something is detectable it can be shared to benefit the whole community.”
Alex Viall, Behavox
As a result, the vendor market for FX monitoring solutions might not be anywhere near saturation point, says Graham at ADS, which has developed an in-house product that supports real-time monitoring of all trading positions.
“Companies want a real hand-holding process when implementing surveillance software,” he suggests. “They cannot afford to get it wrong and hefty personal fines have meant that senior management can no longer delegate responsibility to back office staff.
“We have carried out development work in-house so that we are in control of the systems, and when changes are required these can be made to the timescales we require.”
Database technology is the key FX monitoring and surveillance tool, suggests b-next's Fabisch, adding: “The most advanced tools will offer in-memory techniques for ultra-fast data processing. They will also include intelligent, highly flexible rules with intuitive parameter controls that skilled domain experts can use without in-depth IT knowledge.
“Sophisticated business intelligence tools with strong visualization capabilities, as well as powerful, easy-to-use case management and reporting tools are also important.”
In addition, there is a burning need for more automated analytical supervision and holistic profiling of the broker/dealer community, concludes Behavox’s Viall.
“The point solutions that dominate the market, however well trained and configured, will only ever look at individual trades, chats or phone calls,” he says. “And even the most ardent supporter will admit that they are a blunt instrument not far advanced from the random sampling of the early 2000s.”