{"id":44699,"date":"2020-10-29T03:42:09","date_gmt":"2020-10-29T10:42:09","guid":{"rendered":"\/us\/en\/blog\/?p=44699"},"modified":"2025-07-01T06:17:31","modified_gmt":"2025-07-01T13:17:31","slug":"a-billion-dollar-compliance-alarm-for-the-financial-services-industry-regulated-communications-surveillance","status":"publish","type":"post","link":"\/us\/en\/blog\/a-billion-dollar-compliance-alarm-for-the-financial-services-industry-regulated-communications-surveillance\/","title":{"rendered":"A billion-dollar compliance alarm for the financial services industry: regulated communications surveillance"},"content":{"rendered":"

The CFTC\u2019s notice to JPMorgan has just made the realm of real-time communications surveillance a billion-dollar topic for Board Rooms.<\/i><\/b><\/h3>\n

Last month, JPMorgan settled charges with the Commodity Futures Trading Commission (CFTC) for manipulative and deceptive trading conduct, specifically spoofing orders in precious metals and U.S. Treasury futures contracts. It was the largest fine ever imposed by the CFTC, nearly a billion dollars.<\/span><\/p>\n

A harsh slap heard beyond the futures industry<\/b><\/h3>\n

\u201cIt\u2019s an important message,\u201d states CFTC Enforcement Director McDonald, who commits in its <\/span>press release<\/span><\/a> \u201cto eradicate this unlawful activity and to hold those responsible fully accountable,\u201d adding, <\/span>\u201cyou will be caught, punished, and forced to give up your ill-gotten gains.\u201d<\/span><\/p>\n

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SPOOFING<\/b><\/div>\n

Traders enter Spoof Orders to create a false impression of buying or selling interest, with the intent to manipulate market prices and trick market participants into trading based on their spoofing.<\/p>\n<\/div>\n

Regulated communications surveillance: an ineffective system<\/b><\/h3>\n

The CFTC Order reviews the actions that JP has taken and will take to enhance its market compliance program and internal controls. The usual actions are listed, such as updates to policies, supervisory actions, violation tracking, and increased resources and budget.<\/span><\/p>\n

However, a critical part of the Order relates to building a <\/span>more robust electronic communications surveillance program and capabilities.<\/span><\/i> JPM attests to:<\/span><\/p>\n

Increasing its electronic communications surveillance program, such that JPM\u2019s communications surveillance platforms automatically ingest and process approximately 100 million messages on a monthly basis, and analysts review 100% of the alerts generated from these surveillances.<\/span><\/i><\/p>\n

It appears that the messaging and voice, between the traders, fell outside of their risk surveillance systems. From reading the Order, this was an important issue in the CFTC\u2019s determination that <\/span>JPM\u2019s surveillance system lacked the ability to effectively <\/span>identify<\/i><\/b> spoofing conduct.<\/span><\/p>\n

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TO PROVE THE VIOLATION:<\/b><\/div>\n

In order to prove a violation of Regulation 166.3, the Commission must demonstrate the registrant\u2019s supervisory system was generally inadequate or the registrant failed to perform its supervisory duties diligently.<\/p>\n<\/div>\n

Spoofing evidence: chat conversations<\/b><\/h4>\n

The CFTC presents a clear picture. Their spoofing evidence<\/a> includes chat conversations, correlated with trade flow. The examples include Trader 1 chatting Trader 3 \u201cjust bid it up to . . . sell.\u201d In another instance, chats to a Salesperson confirm another Trader is \u201cbidding up on the futures trying to get some off\u2026 in case you were watching some large bids come into market.\u201d<\/span><\/p>\n

Firms have largely integrated real-time trading surveillance across order flow, asset classes, and trade venues. But the realm of real-time message, video, and voice surveillance has lots of room for improvement.<\/span><\/p>\n

Real-time communications surveillance gaps<\/b><\/h2>\n

To detect spoofing, trading firms need to surveil much more than order flow and executions. <\/span>This is the CFTC\u2019s point:<\/span><\/p>\n

Market participants have tackled fragmented venues and complex order types but not the fragmented and siloed communication methods.<\/span><\/i><\/p>\n

Whereas firms have normalized, tagged, and aggregated <\/span><\/i>trade<\/i><\/b> data, they do not systematically aggregate for analysis <\/span><\/i>communication<\/i><\/b> streams.<\/span><\/i><\/p>\n

Unified communications simplify compliance<\/b><\/h3>\n

Until now we recorded and stored the audio, messages, and video. Sometimes we ran speech to text so we could run keyword searches. When auditors asked, we pulled the tapes. But now, it seems that \u201crecord and store\u201d is not enough.<\/span><\/p>\n

To detect spoofing, firms are expanding their Enterprise <\/span>T<\/span>rading Risk Systems to aggregate, tag, and analyze messaging, video, and phone communications stemming from multiple siloed trading applications. Not just <\/span>new <\/span><\/i>modes of communications\u2014but <\/span>fragmented<\/span><\/i> and multiple duplicative systems offering messaging, voice, and video connections\u2014<\/span>has made the job difficult.<\/span><\/p>\n

However, a unified communications platform<\/span>\u2014<\/span>as a core enterprise system<\/span>\u2014<\/span>can give firms the tools, access points, and economies to efficiently feed multiple systems for surveillance, compliance, audit, and proprietary analysis.<\/span><\/p>\n

Is Lexicon character matching effective communications surveillance?<\/b><\/h4>\n

In the Order, JPM attests to \u201cupdate the universe of monitored employees and revise its lexicons on a regular basis to address evolving risks as well as utilize technology that allows for lexicon-based surveillance of voice recordings.\u201d<\/span><\/p>\n

Many experts believe lexicon character matching is not sufficient. <\/span>More advanced electronic communications surveillance applies statistical methods to analyze networks, map relationships, and show interactions across groups of users.<\/span><\/p>\n

Real-time unified communications surveillance: a new item for the Board agenda<\/b><\/h4>\n

Maybe, with the price of penalties and restitution going up, Compliance and Risk groups can prove an ROI to invest in a more rigorous communications surveillance system.<\/span><\/p>\n

One thing is for sure, the CFTC\u2019s notice to JPMorgan has just made the realm of real-time unified communications surveillance a billion-dollar topic for Board Rooms.<\/span><\/p>\n

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\n\t\t\tRingCentral for Financial Services\t\t<\/div>\n
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\n\t\t\t\t\tWhat role do unified communications play in making surveillance faster, easier, and more complete?\t\t\t\t<\/div>\n<\/p><\/div>\n
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