Reactive Compliance to Intelligent Proactive Compliance

Author: Cromwell Fraser, Director Strategy and Business Development Trading Floor Industry Business Unit at NICE Systems (
Cromwell Fraser

Historically compliance teams within banks have typically been viewed as the people who Police the business. Traditionally, they have sat isolated from the trading floor and rarely communicate with traders. However, a huge cultural shift is taking place in banks around the world, as they recognise the potential of taking a more proactive approach to regulatory compliance, to not only mitigate the risk of exposure to malpractice and hefty fines, but also to make a bigger contribution to the trading process.
As regulation has steadily increased in recent years, becoming more complicated, stringent and defined, banks are recognising that their compliance teams can be a real asset to the business. By working alongside traders, rather than just monitoring, or reporting on their activities, they can be invaluable in guiding them through the minefield of regulation, to ensure more trades are completed successfully and crucially, within the rules.

Much of the new regulation we have seen introduced has been in response to the changes in the way traders now communicate with each other. When we (NICE Systems) first started providing our solutions to banks the requirement was to capture, time-stamp and store all of the voice communications that took place on the trading floors, for record keeping purposes. Today, trading floors are very different environments and traders use not only trading turret but email, chat, social media, etc.
The Dodd-Frank Act which came in to force on 12th October with the remit to increase transparency in financial transactions means that is no longer enough to just retain the data.  In relation to SWAP transactions, Dodd-Frank makes it necessary not only to capture all relevant communications (all communication must be monitored by the same rules), but also to be able to reconstruct the trades as they happened. Some solutions have started to utilize technology to spot words within voice in an effort to help with this challenge. With this approach it is possible to manually sort records and reconstruct a voice communication in sequence, but depending on the level of complexity it could take weeks, or even months to achieve, and this far from the best use of time and resource, of highly skilled Compliance Officers. Surely, it is far better that compliance focuses on helping trades complete within the guidelines in a proactive manner, rather than laboriously and reactively piecing together a puzzle at the demand of the regulators. This whole situation is confused even further when you introduce the other communication channels such as email, chat etc. Historically to fully understand a commutation path compliance teams have to run separate investigations and in some cases using different, separate investigations tools.

The latest technology available to compliance teams completely changes the way this challenge is addressed. Intelligent cross channel searching truly offers a single focus on communications ensuring institutions can adhere to the requirements of the Dodd-Frank act in a meaningful and dynamic manner. This transformation of accessing and understanding the records allows compliance to reconstruct entire trades in a matter of minutes and present them (and indeed the regulator) with an onscreen timeline from which to replay the complete trade as it happened. However, its value to the business extends beyond mitigating risk, routing out intentional wrong doing and preventing fines. It also enables compliance teams to become facilitators to course correct traders, in order to ensure the deal can be completed within the confines of the rules.

Proactive cross-channel analytics solutions are gaining favour for their ability to empower compliance teams with the tools to continuously monitor all trading floor communications and be automatically alerted if any predefined words, phrases (including trading floor jargon) and conversational patterns are used that could signal insider trading or market abuse. Furthermore, all of the captured information is easily accessible and searchable, enabling the Compliance Officer to explore, discover, investigate (integrating with their Case Management systems) and where necessary intervene and act.For example if a Chinese Wall is in place the team can proactively monitor communications to maintain its integrity. Similarly, the system can look for trends, so if a phrase is increasingly being used it will be flagged.

We are still in the early days of this cultural shift, but the wheels are in motion and without exception, every Heads of Compliance that I have spoken is in agreement that whilst Policing will always be important, a shift towards proactive compliance is without doubt the right direction. The ability to unify the different records keep within a institution and the powerfully bring it to life in way that historically was unheard of is facilitating the support of this change. Fast and effective intelligence is the need of the day, regulators, compliance and the institution demand knowledge and insight and they want it now.