The Right Kind of Automated Trade Reconstruction

Why adopting the right kind of automated Trade Reconstruction capabilities, complete with Data Integrity assurance, is vital in preparation for a post-COVID world.

The problem, as we know, is not new. What arguably began with the catalytic Financial Crisis of 2008, and then the likes of the LIBOR scandal in 2012, has resulted in an ever-increasing demand for better governance within the financial sector, generated by regulatory bodies’ worldwide in the form of mandates such as Dodd-Frank, MAR, MiFID II and most recently SM&CR. However, while firms have implemented various solutions across their trading and communication infrastructure, and attempted to further efficiency efforts by running additional solutions to cross-connect and monitor these various ‘data generators’, the monumental task of responding to regulatory investigation timeframes around a trading activity, with a complete set of records, (in as little as 72 hours), still looms overhead like a dark cloud.

The problem has cost firms vast amounts of money and a significant reliance on manual resource. Current compliance monitoring efforts are generating significant business risk:

  • Business indicators are insufficient to protect senior management
  • Existing solutions are not fit for purpose, leaving compliance gaps
  • Firms are locked into expensive contracts with hidden costs
  • Legacy and even some new “automated” solutions still require too much manual resource

If a firm’s monitoring efforts therefore suffer from these challenges, the associated burdens of providing comprehensive reconstructions around a trade, across all data points, and within 3 and a half days from the point of request submission, are all too obvious.

But the solution isn’t new either; in fact, near to real-time automated trade reconstruction has been a fundamental component of SOTERIA’s compliance and surveillance SaaS for over 4 years. It is because of this experience therefore, that we know the answer to the problem is not even just a matter of capturing and aggregating data sources, or cleansing, structuring and then connecting data together from channels including:

  • Live capture of Electronic, Audio and Video;
  • Legacy channels;
  • Trade and market data;
  • Market news;
  • Market abuse platforms;
  • Trade order books;
  • CRM systems;

all of which SOTERIA does, in an agnostic fashion, as part of our approach to comprehensive business risk reduction.

Data aggregation, cleansing, structuring and correlating however isn’t enough. While every financial firm and vendor would rightly argue that achieving the afore mentioned is a feat in itself, and is indeed a quantum leap towards facilitating automated case reconstruction, there are two factors that continue to remain overlooked.

Evidential Weight and Duty of Care. “I have seen seemingly complete trade reconstructions, provided within the regulatory timeframe, then torn to shreds by a Court of Law. It is a very real problem. Unfortunately, as Data Integrity is one step further than the initial monumental task which most firms’ face of aggregating, structuring and reporting upon an infinite number of instrument reference points, that span across the business and its employees, it is a step too far.” (Rob Houghton, CTO, SOTERIA)

However, the problem of proving compliance is only then delayed. If a firm cannot prove that all records are complete, and that through the capture, correlation and reporting process, data has not been tampered with, in any way, the validity of the records becomes void.” 

The immutable digital ledger. “Evidential Weight and Duty of Care is where I started over 30 years ago, and these are the fundamental principles that have steered every piece of technology I have developed, including SOTERIA.

“All systems, all recorded data, must have an Immutable Digital Ledger; a tokenised and 3rd party verified register that records every touch point throughout the data’s lifecycle. There should also be an accompanying audit trail that independently logs every system keystroke and user action relating to a record, according to a universal time stamp. Without this level of verification, firms cannot prove their compliance, and any trade reconstruction solution, whether automated or not, will not lessen the overarching risk to the business.”

The COVID catalyst. While trade reconstruction is already a well-established issue, the release of new regulation ‘Senior Management and Certification Regime’ (which now places the responsibility of a firms’ behaviour and compliance on specific individuals, and not just the business as a whole), has brought with it judicial sentences for guilty parties, to add to the already enormous fines.

Additionally, as the industry grapples with the impacts of COVID on business operations, firms’ adoption of new digital transformation initiatives and emerging remote working tools, to sustain business continuity, is opening fresh compliance gaps; compliance gaps which regulators have already vocalised are on their radar, and have shown little leniency towards.

Why now. In short, under no circumstance, including a global pandemic, should financial firms be prevented from operating in accordance with existing regulatory mandates, which means that once the world begins to recover from the current impacts of continued lockdown, the financial sector will arguably be even more exposed and under even further regulatory scrutiny to prove comprehensive compliance across the business, especially during a time of such wide-spread disruption.

Without the support of an evidentially-structured and verification-based SaaS solution however, firms’ compliance and trade reconstruction efforts will have little validity, if any.