03.25.2015

Pillar #5 of Market Surveillance 2.0: Cross-region monitoring

Pillar #5 of Market Surveillance 2.0: Cross-region monitoring

By Theo Hildyard , Software AG
@theohildyard

In the fifth blog in our series outlining the Seven Pillars of Market Surveillance 2.0 we look at how monitoring across different regions can assist compliance managers in adhering to different regulatory environments.

Cross border surveillance becomes increasingly critical as financial services firms and investors trade multiple asset classes across many countries and disparate regulatory regimes, which can create confusion and opportunities for error.

Regulations in different countries (e.g. Dodd-Frank vs. MiFID) can be very similar but slightly different. Regulatory arbitrage is a concern, as trading firms could choose to do business with more lightly regulated regimes; taking extra risks with their company’s money and reputation.

Theo Hildyard, Software AG

Theo Hildyard, Software AG

At the British Bankers Association annual meeting in London in November 2014, the deputy governor of the Bank of England, Jon Cunliffe, warned about regulatory arbitrage. He asks whether it is possible for the world’s key regulatory police can ensure that there is consistent implementation across jurisdictions.

The answer may lie with surveillance. Using trade data, historical data and real-time analytics, a bank can watch every market position real-time and match these to new positions, marking everything to market, and flagging any breaches in capital reserves. Taking this further the bank can factor in capital reserves in the pre-trade environment, ensuring that each and every trade passes the capital adequacy test before the trade is completed. It could also monitor its positions for the net-stable funding rules.

That way the bank is compliant at any given time during the global trading day, and has less of an excuse to seek out a looser regulator regime. Using the same risk management system, but with appropriate versions for different regions, cuts complexity and saves money.

In my last blog, Pillar #4 we explored the rationale behind needing support for cross-asset class monitoring. While it used to be common to monitor each asset class as a separate entity in so-called silos, it has become clear that many asset classes are highly correlated. In other words, events that impact one asset class can have a knock-on effect to others.

The same is true with geographical risk; one country’s fiscal issues – such as what is happening in Greece currently – can impact the entire global economy. Market Surveillance 2.0 is the answer; taking the fast, Big Data from silos of asset classes across time zones and geographies and watching for patterns that signal risk or opportunity, then kicking out real actions to take.

Market Surveillance 2.0 is the next generation of market surveillance; acting like a crystal ball to help us see the early warning signs of unwanted human or technological behaviors that signal error or fraud.

To find out more, download the full whitepaper here

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