New Episode on NaluFM: Regulatory Surveillance Technology
vestr’s Head of Business Development, Stefan Wagner, and CEO of Global Regulatory Surveillance Services (GRSS), Joe Vittoria, discuss the topic of regulatory surveillance technology, how it works and how to use it efficiently.
The two also discuss the following in the episode:
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It refers to the analysis of two main areas of a regulated firm:
• Trading surveillance monitors how traders are operating, making sure there is no market abuse.
• E-com surveillance monitors what information is conveyed via email & instant messaging. For example, chats like via Whatsapp, Slack, Bloomberg chat, teams. Monitoring these takes time and expertise.
You need extensive systems. And these are incredibly intelligent systems using Artificial Intelligence (AI). We use these systems for their best advantage, namely, to cut down on data.
Think about this scenario: The intention to break the law is not written in an email, but in between the lines, eg. “I’d rather talk about this offline”. A machine has to grasp this nuance.
When conversations are turning and changing, the AI finds it. Then, a human reads through it to identify a true misconduct.
Obviously I am biased, but I recommend to get external advice to use existing systems effectively. Buying a surveillance system does not help alone. You need to know how to use it. Which means, a firm’s compliance team needs to apply filters, lexicons, in order to make it work for their strategy. For example, a Merger org strategy vs. Quant strategy – you are looking for different types of activities both in emails and trading to try to figure out whether they are doing something wrong.
We set up fake emails for compliance to catch. If these were not caught, we informed the compliance team about those emails the system should have caught.
We applied the same principle to trading activities. We created fictitious trades in the systems, which are tagged so they will not end up with the FCA (Financial Conduct Authority in the UK), which the surveillance system needs to catch.
Basically, you need to demonstrate to the regulator that you do the best possible given the resources that you have, and given the type of firm you have. Show that you actively trying to find instances of market abuse.
At the same time, the surveillance system acts as a deterrent: people know that the system is there which prevents them from making a decision that is intentionally harmful. The goal is not to catch people red-handed, but minimise the chances of them getting away with it.
What keeps me interested in the financial industry is recognising that they are generally efficient. And that they are generally doing what they are supposed to be doing.
But there are inefficiencies. When looking for those inefficiencies you are motivated to look for a way to fix it. I was attracted to regulation and became an early participant in regulation hosting industry. My pervious company, Mirabella, was one fo the first speed-to-market solutions that addressed the issue of the lengthy process of setting up new fund firms. I am talking about hosting firms for starting new firm right away. We took a set of existing rules and figured out how to make something else work.
Another gap in the market place was the starting point for GRSS: analyse and filter the output from in-house trade and communications surveillance systems.
Hosting industry underwent serious examination, which created a lot of misunderstandings. For example, shadow regulation or regulatory “lite”.
Regulation is perceived as boring. So, we try to make it interesting with new solutions.
Technologies like blockchain will have an impact. The bigger impact however will come from the application of AI, and more specifically, predictive analysis.
Regulation perceives some problems to be more wide-spread than they are, but does not pay enough attention to the ones that actually are.
Having listened to your podcast before, I reflected on this and would like to share 4 of the movies I think are worth mentioning:
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