How does Digital Communications Analytics address Market Abuse Regulation (MAR) requirements?
Existing financial regulation in the US and regulation coming into force in the European Union requires the recording of digital communications. Technology plays an important role in meeting these more onerous regulatory requirements. Digital Communications Analytics (DCA) is an innovative combination of communications and surveillance technologies. It aims to address regulatory requirements and offers capital markets participants a means of protecting reputations that have been tarnished by recent cases of market abuse. Expectations are high for such technologies, with research analysts forecasting the market for speech analytics solutions alone, will experience compound annual growth of 22% by 2020. This paper explores the capabilities of the latest digital communications analytics technology including:
- Data visualisation and analysis
- Data interrogation (search and find)
- Multi-language support and reporting
It also examines DCA’s role in the surveillance of trading activities to combat fraudulent activities and how it can help capital markets participants to comply with new MAR regulations.
What is Digital Communication Analytics (DCA)?
DCA is an innovative trading and surveillance technology solution that combines and integrates advanced speech and digital text analytics with capital markets surveillance. The solution can help you to search and analyse voice call recordings and digital text communication including email, chat, social channels, by time frame, trader, counterparty and trader desk. This capability addresses increased regulatory demand for trading and communications surveillance, especially as regulators across the globe align capital markets mandates and rules, and increase financial and criminal penalties for fraud and market abuse.
A growth market
The market for communications analytics is experiencing global growth. Recent research predicts that the speech analytics market alone is estimated to grow from USD 589.1 Million in 2015 to USD 1.60 Billion by 2020, at an estimated CAGR of 22.0% from 2015 to 2020. While contact centres are turning towards speech analytics solutions to efficiently gain insights from customer interaction data, the research also goes on to explain that one of the main drivers for such growth is an increased focus on stringent risk and compliance management.
DCA’s role in regulation, reputation, and the detection of market abuse
Recent Libor and FX benchmark price manipulation occurrences and high-profile insider trading have damaged the reputations of some of the most respected institutions, resulting in nine figure fines for large banks. This has brought the need for analysing and monitoring digital communication into sharp relief. Consequently compliance regulations across the world have tightened to include monitoring of all digital communications.
In the U.S., the Dodd-Frank Act requires searchable and identifiable voice recordings, while in the EU, the Financial Services Authority and European Securities and Markets Authority point to MiFID II Level 1 regulations and legislation requiring the recording of telephone conversations and electronic communications.
Regulation is not the sole driver however. Loss of confidence in investor relations, as well as challenges to hard won reputations, have prompted a call for improved risk management and surveillance capabilities. Innovative surveillance technology offers protection against damages to reputation from market abuse and fraud, while also ensuring compliance requirements are met and associated processes are followed.
The vulnerability of the largely unregulated Forex market, to market manipulation is highlighted by forms of trading behaviour associated with Forex rigging which include collusion. Such behaviour manifests itself when several traders collude to share information and place orders at the same time during the ‘fix’ window, the impact on price movement can be dramatic, producing greater potential profits for traders in collusion.
The most advanced and effective market surveillance solutions will have the capability to detect and report suspicious trading activity involving collusion. A lot of daily benchmark rates are calculated based on trading activity so it is important that compliance monitoring is implemented. However, some benchmarks are still calculated based on a bank making a submission. Such submissions are often verbal. It is here where there’s a clear need for participants to implement voice-monitoring solutions for this type of activity, especially in the light of the MAR directive and other regulatory requirements for searchable voice recordings. DCA can prove particularly relevant and valuable as a tool to address this need.
Key DCA capabilities
The benefits of automation
Such is the complexity, magnitude and dynamic nature of the surveillance task that automation is emerging as a viable and practical solution. The benefits of implementing automated solutions are wide reaching and can include:
- The ability to respond quickly to regulatory changes and reporting requirements
- A reduction in workload and associated costs
- Proactive management of suspicious trends
- Improvements to the quality of market abuse monitoring
- Improvements to risk management and compliance oversight
DCA solutions will include a high degree of surveillance automation while also demonstrating the following important capabilities.
Advanced database technology
Advanced database technology is pivotal in the surveillance and analysis of digital communication. In-memory techniques enable ultra-fast data processing, while intelligent, highly flexible rules with intuitive parameter controls can be used those with little knowledge of technology.
Intuitive state of the art user interfaces
Ease of use not only minimises training requirements, but also allows skilled domain experts to use systems without in-depth IT knowledge. Intuitive interfaces will play an important role in simplifying, search, navigation and workflows, while accelerating insights.
Data visualization and analysis
Sophisticated business intelligence tools can enable strong visualization capabilities, as well as powerful, easy-to-use case management and reporting tools. Data support should include: SMS / Text messages; Instant Messaging; Emails; Facebook; Twitter Feeds; Market Data / News Feeds.
DCA solutions should have the capability to analyse data to reveal statistics relating to digital communication. This would include trends and frequency of communication, or the identification of participants in digital conversations and a ranking of key words used.
Search and find
The ability to search and find digital communications data is stressed by The Dodd-Frank Act, which requires searchable and identifiable voice recordings. DCA solutions must therefore offer fast, accurate and intelligent interrogation of voice and data communications activity. Ideally this will be achieved via keyword searches to find recorded voice and data communications, allowing users to listen to historical voice recordings or view digital text based communication on demand.
Multi-language support and reporting
As trading takes place across borders and trading venues, multi-lingual and reporting capabilities are crucial features. DCA solutions should be capable of lossless transcription of calls in multiple languages. Reporting functionality should include a tamper-proof audit trail, history of alerts and calls.
The ability to alert users to potentially fraudulent activity is central to a DCA system. Important features will include the tagging of communications data for comment as required so that unusual communications data is linked and attached to alerts and highlighted for future reference.
New compliance requirements from MAR, reputational risk and the need for detection of market abuse, build a compelling case for adopting surveillance solutions that incorporate DCA capabilities. With the MAR countdown already underway and the availability of DCA solutions including b-next’s own CMC:DCA offering, the case for MAR readiness has never been more compelling.
b-next is a specialist global provider of proven multi-venue, multi-asset class software solutions for Capital Markets Surveillance and Compliance. We support an expanding international customer base of financial institutions, investment managers, energy traders, trading venue operators, and supervisory authorities, helping them to meet regulatory mandates, manage risk and drive trading efficiencies. Visit www.b-next.com
 Article 7 DIRECTIVE (EU) 2015/2392
 Financial Conduct Authority – Financial Benchmarks: Thematic review of oversight and controls – July 2015