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Risk & Compliance

What Keeps Compliance Chiefs Up at Night? Read On.

What Keeps Compliance Chiefs Up at Night? Read On.

  • By Jimmy Kvarnström, Head of European Surveillance at Nasdaq, Martina Rejsjö, Head of Market Surveillance Equities North America at Nasdaq, and Valerie Bannert-Thurner, Senior Vice President and Head of the Buy-Side and Sell-Side Solutions Business at Nasdaq

For the last five years, we have conducted a comprehensive study of compliance professionals from sell-side and buy-side firms, market infrastructure operators and other capital market stakeholders. The focus has been on trade surveillance mainly, but in 2019 the scope of the survey was widened to include questions pertaining to anti-money laundering (AML) and know your customer (KYC) compliance. The absolute responses in a given year are always interesting, but seeing how trends develop over time is truly enlightening.

Through the years, the survey respondents have consistently reported that the role of compliance has become more important throughout their organization. This is demonstrated by the fact that nowadays compliance heads often report directly to the CEO or chief risk officer. 

Like in previous years, the respondents perceive that compliance’s core function is to uphold and protect the firm’s reputation. But this year the data reflects a significant increase in concern about regulatory enforcement actions and avoiding fines. In fact, nearly a quarter of respondents report that this is compliance’s most important function. Further, there’s a noticeable increase in compliance’s interactions with the legal department. Our take is that regulatory mandates such as MiFID II have now been implemented, and compliance departments feel compelled to respond proactively to greater regulatory scrutiny.

For the first time since 2015, the data show that budgets are softening. About half of the respondents expect their budgets will increase in 2020, a smaller number than in previous surveys. They also report that cost concerns are a challenge when it comes to developing monitoring infrastructure. Put simply, compliance departments need to do more with less and work smarter to stay ahead.

Staffing trends reveal that firms are considering new hires with fewer years of experience, and they expect to rely more heavily on external sources for regulatory expertise. That’s not to say that they won’t continue to hire experienced data scientists and investigators; it’s just that they’ll need to equip their junior staff with better tools for training, alert reviews and performing deep-dive investigations. 

Trade surveillance is still the most frequently cited compliance budget allocation, even more so than in previous survey years. This area was also mentioned most often as being a use case for automation and specialized technology.

Reducing false positives remains a top priority for trade surveillance professionals, and we were intrigued to discover that compliance professionals in AML/KYC are struggling with the challenge. To some extent, this is a garbage in, garbage out problem, and firms know they have to fortify their data quality, streamline the integration of different data types and incorporate various sources of data into the surveillance system.

Ultimately, the goal is to obtain a holistic view of activity in the market. That involves analyzing structured market data and unstructured data from social media and electronic messaging, as well as leveraging behavioral analytics. Once a consolidated audit trail is in place, firms will have the visibility to monitor activity more effectively across regulated exchanges, alternative trading systems and multilateral trading facilities. 

Given the squeeze on resources and top priorities, there’s greater demand for machine learning (ML) artificial intelligence (AI) and cognitive assistants. Specifically, the survey respondents have increased their investments in AI dramatically: 42% report that they have invested in it recently, and 65% plan to invest in it over the next 12 to 24 months. These technologies can support an efficient compliance program, the analysis of the effectiveness of alerts, the intelligent scoring of alerts, and the build-out of investigative capabilities. To get the most bang for the buck, the same tools can be used in both trade surveillance and AML/KYC, and learnings can be applied in one domain to the other.

Surveillance is a process, and ideally firms should try to optimize the speed and accuracy at which they go through it. Data volumes are increasing constantly, and AI tools can help break through the noise and eliminate false positives more quickly. They not only streamline the investigative process, but they also make it possible to learn from experience and improve the process continuously. That way investigators can prioritize alerts and focus on suspicious activity that’s more likely to be real market abuse. That said, it’s important to take a targeted approach to using AI, know how to use it and understand what problems it can and can’t help to solve. 

Financial crime won’t be eliminated solely by developing better mousetraps and implementing harsher regulations. The solution needs to be more fundamental than that. Organizations and incentive structures need to be designed so there is zero tolerance for crime, and a process for people to report abuse without fear of retribution must be established. The entire industry has to be onboard with supporting market integrity and building investor confidence.

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