Coronavirus Pandemic Drives Change within Compliance Process

Nasdaq, in collaboration with Greenwich Associates, has unveiled the sixth annual Global Compliance Survey, finding that global factors, such as the coronavirus pandemic, were the primary driver of compliance process changes, even surpassing regulatory scrutiny. The survey gathers qualitative and quantitative feedback from over 200 compliance professionals and executives in the financial industry worldwide, representing sell- and buy-side firms and market infrastructure organizations.

“In our latest report, there appears to be a notable increase in unplanned technology spend as firms continue to adjust their processes and priorities to remain resilient and to uphold the integrity of the financial markets during the global pandemic,” said Valerie Bannert-Thurner, Senior Vice President and Head of Buy-Side and Sell-Side Solutions, Market Technology at Nasdaq. “The growing importance of compliance combined with the accelerating demand in surveillance technology signals that compliance will play a more pivotal role than ever in 2021.”

Nasdaq's Jimmy Kvarnström, Co-Head of European Surveillance, and Martina Rejsjo, Head of Market Surveillance Equities North America, echoed Bannert-Thurner, sharing their insights on how the pandemic has affected their work and how they are managing a new type of normal during a time of extreme market volatility and uncertain market conditions.

The pandemic heightened challenges and shifted focus areas for many compliance personnel, especially as volatility rocked the markets in March. Financial firms had to quickly adjust monitoring and alert coverage while employees transitioned to remote work amid extreme market volatility. According to the survey, market manipulation and alert management were cited as the two most important requirements for 63% and 54% of the respondents, respectively.

“Volatility is always hard to handle when it comes to a surveillance function – the number of alerts and activities to analyze is so much higher than normal,” said Rejsjo. “There’s also the notion of having a new normal that’s no longer normal. How do you know what’s normal in a completely unusual situation? So that’s the challenge, of course, to handle a higher workload and also to analyze what is the cause of the market movement and the uncertainty or what is the cause of someone actually doing something bad in the market.”

Rejsjo noted that Nasdaq’s surveillance systems are “somewhat self-calibrating,” taking into account historical benchmarking, confirming the importance of reliable and robust surveillance technology. “They really did adjust to a new normal,” she said. “Eventually we had the conditions we were working in as a benchmark, and that helps reduce the noise and got us back to more of the stable work environment.”

The heightened volatility and uncertain market environment highlighted the importance of having robust technology and the need for flexibility in the technology, according to Kvarnström. To this end, compliance technology spending skyrocketed, particularly for surveillance technology. According to this year’s survey, approximately 30% of respondents reported budget increases in 2020 and expect increases to continue in 2021.

Spending on compliance technology is soaring, in large part, because of the variety of ways it can be used to analyze data, according to Rejsjo. “Everything we do is analyzing data, and you have this new technology with [artificial intelligence] and better tools to monitor internal communications,” Rejsjo elaborated.

With these technologies coming to the forefront of the compliance process, “it is equally important to make sure to also manage regulatory expectations,” said Kvarnström.

“Quite often, technology development and regulatory acceptance are not fully aligned,” Kvarnström continued. “So, working proactively toward what our regulators asked thought leaders to explain and having a proactive dialogue around how technology can help us to improve market integrity is an important part of what we need to do when we roll out new technology.”

While financial firms focused heavily on ramping up their compliance technology this year, reputation management continues to be a driver of regtech investment decisions. According to the survey, 68% of respondents confirmed that reputation management is the most important mandate of compliance departments, while 67% of respondents have dedicated resources specifically to manage reputational risk.

“I think that just speaks to the core of the trading venue,” said Rejsjo. “If you don’t have a good reputation for being fair and transparent, then you don’t really have a good platform for people to feel secure and confident. So, I think this is really one of the two important things to always maintain the reputation of being fair and transparent and have high integrity.”

To read the full report, click here.

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