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Market Surveillance

The Opportunities to Integrate Market Abuse Surveillance with Fraud and Financial Crime

Integrating market abuse surveillance with fraud and financial crime is a hot topic in compliance circles. @Nasdaq recently participated in a panel, discussing when it makes sense to integrate and some of the practical implications.

Integrating market abuse surveillance with fraud and financial crime is a hot topic in compliance circles nowadays. There’s a shortage of people who understand compliance, regulation and technology, so having a joint strategy across all of these surveillance programs allows banks to get the most of their compliance and technology investment. Nasdaq recently participated in a panel at XLoD Global with participants from major banks, discussing when it makes sense to integrate and some of the practical implications of integrating across multiple risk types and geographies.

To date, most banks still have different teams focusing on specific risk types, and relatively few banks have actually achieved full integration. However, a significant number are working to implement a consistent approach across programs – where their operating models, the data they use and the escalation trees feed into the same governance models. To illustrate, some banks have organized trade surveillance, transaction monitoring and financial crime under one senior manager, but they’ve kept compliance and financial crime separate. Others have consolidated their surveillance and fraud programs into their financial crime program. One size doesn’t fit all.

The panelists suggested that banks may need to reach a certain level of maturity before full integration makes sense. Banks that aren’t at that stage yet can gain a second-mover advantage, where they can learn from others’ experiences and improve processes further. They agreed that given the potential for incurring regulatory fines and sanctions, a conservative approach is appropriate, and it’s important to ensure that existing processes are operationally sound before tinkering with them in a major way. 

Integration is a change management process that involves many stakeholders. It’s hard. You need to build consensus around the objectives, identify some short-term practical steps, develop a long-term vision, and lay the foundation for achieving that vision. It’s pretty challenging to do that while keeping all of the programs working to meet current expectations. 

Now that they’re part of the way down this road, the panelists provided four useful tips to help others succeed:

  • Achieve economies of scale and minimize costs by having an expert who has already been through this exercise support all the surveillance programs. 
  • Standardize taxonomy because different sectors of compliance often use different terminology for the same risks. Standardizing the taxonomy will also help to standardize the escalation process. 
  • Take note of the three C’s of integration – collaboration, communication and clarity. That will help you understand how the second line works with the first line.
  • Create a center of excellence within the bank to share best practices as well as establish standards and output from surveillance activities across all programs.

A key takeaway is that market abuse, fraud and financial crime have become so complex that humans alone can’t keep up, so implementing sophisticated technology is critical. Some vendors offer traditional products and solutions that solve a particular business problem. Others offer solutions with generic capabilities for solving an array of problems. 

Banks have become more interested in using machine learning (ML) and artificial intelligence (AI) to analyze customers’, traders’ and insiders’ behavior as well as optimize processes. From an integration perspective, ML can be set up as a centralized function that leverages big data and supports the different surveillance silos, enabling teams to monitor activities thematically and detect outliers. It’s significant that internal auditors and external regulators are getting more comfortable with ML and AI solutions, especially ones that explain the end decisions.

Nasdaq, for example, offers a platform and various applications – including market surveillance and financial crime – that can sit on top of it. The applications are based on open standards and APIs, so they integrate with other solutions. Nasdaq Automated Investigator for AML leverages AI to automate level 1 and parts of level 2 in the investigation process. It helps to eliminate the huge number of false positives generated by transaction monitoring systems. As such, experts have more time to investigate real cases, and regulators don’t have to cope with as many low-value suspicious activity reports. In addition, the solution’s cross-cutting horizontal capabilities support complex investigations across silos.

The panelists concluded the session on the topic of technology. They concurred that from an operational perspective, leveraging a single technology vendor can provide additional benefits and synergies. In closing, their advice was to establish a process for thinking about technology investments, prioritizing across the different budgets and allocating resources sensibly. Doing so will unlock opportunities to integrate surveillance of market abuse, fraud and financial crime.

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