The world of FX has been fortunate to have relatively easy access to good practices and advanced technological solutions, but when it comes to implementing an effective surveillance program, the task remains a significant challenge.
In an article recently published by Euromoney magazine, several industry figures - including Itiviti's Johannes Frey-Skött, Vice President Trading Apps - break down the factors behind this difficulty and provide guidance for FX firms looking to find effective solutions.
In essence, the complexity associated with surveillance programs revolves around data: where to collect it, how (and how much) to collect, and how to analyze it. The key is to set reasonable thresholds that successfully detect suspicious activity without creating an unmanageable amount of false positives. Crucially, staff also needs to be trained to analyze and interpret the alerts that come out of a system in order for appropriate action to be taken, particularly in light of MAR and MiFID II regulations. While this is true for all asset classes, FX differs in that manipulative activity is likely to be more spread out across different venues, which will affect the type of monitoring and alerting necessary. An additional level of complexity exists in that FX trading venues are typically required to have a number of rules to give operational effect to statutory regulations. Firms thus need to ensure that their surveillance systems are able to adjust in a way that ensures they are not in breach of the venue's rules, which in many cases need to be reported to the statutory regulator.
A business advantage
In a world of shrinking budgets, firms can benefit from taking a holistic approach and leveraging systems that can provide additional functionality around areas such as market maker compliance, best execution, TCA and algo monitoring. This will facilitate the record keeping, reporting and analysis activities required by other regulations such as MiFID II and thus allow for significant cost savings, particularly if the solution is system agnostic (such as Itiviti Analyst). Perhaps most importantly, FX firms should also recognize the very real potential for tangible business benefits arising from the collection and analysis of so much data. Although the primary goal of a surveillance system will always be to monitor and detect suspicious activity, the information that is gathered can undoubtedly be repurposed and used for business development ends. In this sense, any investment in surveillance technology is as much a business-driven one as a regulatory-driven one, making the selection of a reliable system even more critical.