It is something we find interesting at DCM - what do the trainers focus on when training staff about compliance oversight? Lawyers may tend to focus on eCommunications as much or more than on transaction oversight. Many consultants tend to focus more on the surveillance oversight piece. There is a reason for this. This can influence the importance companies place on one tool or the other. Let’s examine why they can serve complementary and important roles.
Look at how the regulators and exchanges get create the basis for an inquiry – how do they start? In today’s world, the most common starting point is by the regulator or exchange (or ISO for power or ACER for the EU) looking at transaction and order level data. This is what they have access to without ever asking your company for anything. Therefore, from the standpoint of preventing there ever being an inquiry, starting with the transaction surveillance can make a lot of sense.
However, in the past many of the inquiries (and even currently – look at OfGem’s latest fine in England) came from internal whistleblowers or, even more frequently, someone else in the market that was on the other side of whatever trading strategy or activity the inquiry covers. Remember, if someone at your desk is scalping the market in an inappropriate manner, someone is on the other side losing their scalp. And when those inquires arose (and arise), the regulators can come right in and ask you to keep everything – including your emails, phone tapes, and texts.
And, while transactions can show patterns, communications can show intent. Many of us in the industry remember pouring over the released documentation of all the Enron communications (come on, those of us in the industry at the time will admit we all searched for our own names in the files either out of curiosity or fear). And those communications did three things:
And that is where eCommunications come in – they are the smoking guns of what you were thinking and who you were working with. So, what does eCommunication surveillance do?
It can attack both the “bad actor” issue as well as the “conduct risk” issues. In the bad actor case, it can show whether the trader was intending to misbehave – the “I’m going to push this close” text”. But it is really in the collaboration phase.
From the bad actor phase, eCommunications can track when a trader is writing, as one vendor calls it, “stupid s*@t”. The compliance officer’s role is to determine if the trader was one time stupid, repetitively stupid or actually recording their state of mind as they violated the rules. If it is writing stupid stuff, I would recommend the simple practice a number of CCOs I know perform when they have someone who is, shall we say, “lax” in the self-monitoring of communications.
They take a random set of emails and texts into the trader’s head of desk’s office, sit them both down and start reading them. It takes very few repetitions of this before the trader self-monitors so they don’t have to go through that again or, in the hard cases, the head of desk informs the trader that they do not want to have to go through that again.
From the “conduct risk” point of view, eCommunications oversight can monitor for situations when the head of desk is pressuring for better performance. Even if the pressure is not to do bad acts, knowing a trader is under pressure is frequently a starting point for increased transaction oversight – scared traders can be reckless traders.
So, eComm can be:
While eCommunication may not be the best way to fend off the start of a regulatory inquiry before it happens, it can be a fundamental and valuable tool in the compliance officer’s kit. And this all tracks back to the concept of how the tools are uses and what training covers.
Next week – what does eCommunications surveillance really do and what can it cover?