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riskGRID trader surveillance

David G. STACK (CTRM ETRM) COMMODITIES LION 5,000+
David G. STACK (CTRM ETRM) COMMODITIES LION 5,000+

The document discusses the history and future of trader surveillance. It describes how surveillance began as an internal and external audit process to monitor traders' activities starting in the late 1980s. More recently, reports from EY and the Bank of England's Fair and Effective Markets Review have approached surveillance from different perspectives, with EY focusing on preventing financial crimes and the BOE report calling for industry leadership to improve collective oversight. The document advocates for making surveillance processes easy and transparent in order to build trust within an organization and gain competitive advantages.

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Trader Surveillance thoughts for the future and some historical perspective fintech*attitude for open surveillability. It is interesting to me that, when we read both EY's孫 and the BoE FEMR report族, it is almost like a Tale of Two Cities. Surveillance is all about preventing crime, or identifying criminal activity right? The first, an auditor's perspective, talks of financial crime: including trader surveillance, anti-fraud and AML. It continues to list capabilities such as forensic data analysis, monitoring & supervision, eDiscovery, IT forensics, information governance and legal IT. It is largely a reactive or defensive approach assuming pending litigation and that the firm is, and its traders are, under investigation. This is certainly one reality, but I suggest it is certainly not the #1 reality. The second takes an organisational strategy approach, which therefore creates an opportunity for competitive advantage Why? Because it means any trading operation has a clear opportunity to be best-of-breed (e.g. utilities) or simply best-of-show (e.g. CTRM) at pre- and post-trade transparency. Trader surveillance is, in fact, as old as trading itself. Having started trading in 1987, I was actively involved in audit processes by end 1988. This was of course both internal and external processes. Since I was involved in assessing portfolios outside my trading area it was not difficult to divine someone else was checking my 'book' too. Silently. For all the right reasons, not perjoratively. And so the Fair and Effective Markets Review dives into FICC Market Standards Board a need for industry to lead a stronger collective process and called for: senior leadership of FICC market participants to create a new FICC Market Standards Board (with participation from a broad cross-section of global and domestic firms and end-users at the most senior levels, and involving regular dialogue with authorities), and draws especial attention to Accountability Regimes (e.g. SM&CR). As a builder of an embedded OTC derivative business at a large physical trader, one had to ensure the confidence of senior management (SM) meaning the executive suite who after all, had the ability to help grow the business or slow it down if they were not comfortable the team was highly effective and responsible, enabling SM to discharge their responsibilities efficiently and effectively. By taking an important role to allow SM to query activity for potential flags (risks) and therefore provide solutions to emerging vulnerabilities driven out of our STP CTRM system, which we designed and built we also gave ourselves the chance to be a major contributor to the flag & solution process. In LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 1 of 4
time, we earned the respect we deserved for being both pro-active and highly communicative. The key enabler was fintech but our attitude towards being openly surveillable was the critical success factor our #1 reality. Even in 2000 it was all about fintech. Fintech that codified our ethics, written in individual RRRO's (roles, responsibilities, rights and obligations), published and agreed at the team level. These became actionable, reviewable and rewardable and, perhaps most importantly reportable. To our senior management, clients and the regulator. We enabled senior management reporting to our shareholders and clients, as well as our bankers. We consolidated regulatory reporting, check-and-balance. We were given exceptional opportunities to represent the company publicly in industry forums (e.g. World Bank) and present next- generation ideas for regulatory developments to the regulator (CFTC). It became part of our differentiation strategy and value driver for the business. Team buy-in was driven by: growing the business depends on observable good behaviour, which will be rewarded. In simple English, one should visit the principal often, and never be sent for. The fintech obviously carried out $P&L performance, and attribution. We generated reports for volumes transacted, curve shift and all the $Greeks (i.e. moneyness, not just numbers). We generated Flash $P&L by trader daily on-the-close, but we were able to do it instantaneously, on- demand. We tracked $P&L for (1) existing open, (2) today's portfolio management and client transactions, and (3) prospective client transactions. We posted client views of their portfolio on a secure website. We could see they had received and downloaded them per our D&D (disclosure & disclaimer) agreements, their execution by the client was part of our AOS, KYC and ISDA margining agreements. Each weeks activity had to be signed off by client senior management, daily by the clients back office not the trader. Internally, each and every trader had to input transactions as completed, none could go home until flash $P&L was completed and it carried a 30 minute deadline to market close. All pretty much standard today some were innovative in 2000. Philosophically then, we can extract some core principles: we know we will be surveilled so let's make it easy conduct rigorous scenario analysis of self and others conduct rigorous scenario analysis of clients for sales team impose team-designed checks and balances e.g. breakevens be anticipatory and predictive prospective transaction analysis predict capacity problems and resolutions (e.g. restructuring) devise quick-view metrics - for example the cumulative backward LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 2 of 4
roll続 enabling oversight and facilitating questioning by senior management. Compound sign off - boss received top sheet signed by deskhead, attached below individual trader signoff and ops manager check also signed. Boss initialled and returned a copy to us. Innovative controls: Variance analysis of Flash $P&L to Actual volumes and money. Variance analysis of New today to yesterdays Prospective transactions Trader, and desk, risk limits were more detailed, rigorous and proscriptive than those required by the overall business. All re-structurings to be priced in separate geographies Trackability of $P&L attribution meant could monitor and report small transacted volumes with exceptionally large margins, large transactions with zero or negative margins, etc. Once a trader booked a deal to STP, control was lost electronically. It had to be released back to trader status for any modification, creating a recorded loop of mistakes, errors etc, trader input errors were zeroed by an equal offset and then re-entered, an auditable trail. IN SHORT desk reporting-tools + trader-designed controls both supplemented any other surveillance being carried out. We assigned a part of compensation pool to be peer-reviewed and GRC- reviewed, taking from under-performers and rewarding innovators and consistent quality providers. Personally, I expected that trader surveillance must acknowledge and reward good behaviour as enthusiastically as it deducts for poor conduct. Winning friends and influencing people: Senior management's job was supported from the desk and GRC, we were a team player. Our communicative competence was high and immediate. We were easy to check both in terms of own and client activity. GRC's job was supported from the desk. We provided checks and balances on everything up to and including available credit capacity or margin amounts owed/due. Surveillance is all about preventing crime, or identifying criminal activity? wrong. It is all about building excellence for a scalable and tractable business model. LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 3 of 4
Great surveillance sets a higher bar for competitors and gains client loyalty. To build a surveillance-enabled business is the goal. That requires confidence building within GRC, with senior management and on the trading floor. 孫 http://www.ey.com/Publication/vwLUAssets/ey-trader-surveillance- report/$FILE/EY%20Trader%20Surveillance%20report.pdf 族 https://www.bankofengland.co.uk/-/media/boe/files/report/2018/fair-and- effective-markets-review-progress-report.pdf? la=en&hash=E3F55D5C0600F927F1E767EAA818C4E571E72FD9 続 Always operating in t+1 derivative world, capable of t+x, we summed positions backwards as NPV cashflows and graphed them to show (1) duration, (2) difference from a week ago, and (3) a day ago. A picture tells more than 1,000 words. LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 4 of 4

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riskGRID trader surveillance

  • 1. Trader Surveillance thoughts for the future and some historical perspective fintech*attitude for open surveillability. It is interesting to me that, when we read both EY's孫 and the BoE FEMR report族, it is almost like a Tale of Two Cities. Surveillance is all about preventing crime, or identifying criminal activity right? The first, an auditor's perspective, talks of financial crime: including trader surveillance, anti-fraud and AML. It continues to list capabilities such as forensic data analysis, monitoring & supervision, eDiscovery, IT forensics, information governance and legal IT. It is largely a reactive or defensive approach assuming pending litigation and that the firm is, and its traders are, under investigation. This is certainly one reality, but I suggest it is certainly not the #1 reality. The second takes an organisational strategy approach, which therefore creates an opportunity for competitive advantage Why? Because it means any trading operation has a clear opportunity to be best-of-breed (e.g. utilities) or simply best-of-show (e.g. CTRM) at pre- and post-trade transparency. Trader surveillance is, in fact, as old as trading itself. Having started trading in 1987, I was actively involved in audit processes by end 1988. This was of course both internal and external processes. Since I was involved in assessing portfolios outside my trading area it was not difficult to divine someone else was checking my 'book' too. Silently. For all the right reasons, not perjoratively. And so the Fair and Effective Markets Review dives into FICC Market Standards Board a need for industry to lead a stronger collective process and called for: senior leadership of FICC market participants to create a new FICC Market Standards Board (with participation from a broad cross-section of global and domestic firms and end-users at the most senior levels, and involving regular dialogue with authorities), and draws especial attention to Accountability Regimes (e.g. SM&CR). As a builder of an embedded OTC derivative business at a large physical trader, one had to ensure the confidence of senior management (SM) meaning the executive suite who after all, had the ability to help grow the business or slow it down if they were not comfortable the team was highly effective and responsible, enabling SM to discharge their responsibilities efficiently and effectively. By taking an important role to allow SM to query activity for potential flags (risks) and therefore provide solutions to emerging vulnerabilities driven out of our STP CTRM system, which we designed and built we also gave ourselves the chance to be a major contributor to the flag & solution process. In LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 1 of 4
  • 2. time, we earned the respect we deserved for being both pro-active and highly communicative. The key enabler was fintech but our attitude towards being openly surveillable was the critical success factor our #1 reality. Even in 2000 it was all about fintech. Fintech that codified our ethics, written in individual RRRO's (roles, responsibilities, rights and obligations), published and agreed at the team level. These became actionable, reviewable and rewardable and, perhaps most importantly reportable. To our senior management, clients and the regulator. We enabled senior management reporting to our shareholders and clients, as well as our bankers. We consolidated regulatory reporting, check-and-balance. We were given exceptional opportunities to represent the company publicly in industry forums (e.g. World Bank) and present next- generation ideas for regulatory developments to the regulator (CFTC). It became part of our differentiation strategy and value driver for the business. Team buy-in was driven by: growing the business depends on observable good behaviour, which will be rewarded. In simple English, one should visit the principal often, and never be sent for. The fintech obviously carried out $P&L performance, and attribution. We generated reports for volumes transacted, curve shift and all the $Greeks (i.e. moneyness, not just numbers). We generated Flash $P&L by trader daily on-the-close, but we were able to do it instantaneously, on- demand. We tracked $P&L for (1) existing open, (2) today's portfolio management and client transactions, and (3) prospective client transactions. We posted client views of their portfolio on a secure website. We could see they had received and downloaded them per our D&D (disclosure & disclaimer) agreements, their execution by the client was part of our AOS, KYC and ISDA margining agreements. Each weeks activity had to be signed off by client senior management, daily by the clients back office not the trader. Internally, each and every trader had to input transactions as completed, none could go home until flash $P&L was completed and it carried a 30 minute deadline to market close. All pretty much standard today some were innovative in 2000. Philosophically then, we can extract some core principles: we know we will be surveilled so let's make it easy conduct rigorous scenario analysis of self and others conduct rigorous scenario analysis of clients for sales team impose team-designed checks and balances e.g. breakevens be anticipatory and predictive prospective transaction analysis predict capacity problems and resolutions (e.g. restructuring) devise quick-view metrics - for example the cumulative backward LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 2 of 4
  • 3. roll続 enabling oversight and facilitating questioning by senior management. Compound sign off - boss received top sheet signed by deskhead, attached below individual trader signoff and ops manager check also signed. Boss initialled and returned a copy to us. Innovative controls: Variance analysis of Flash $P&L to Actual volumes and money. Variance analysis of New today to yesterdays Prospective transactions Trader, and desk, risk limits were more detailed, rigorous and proscriptive than those required by the overall business. All re-structurings to be priced in separate geographies Trackability of $P&L attribution meant could monitor and report small transacted volumes with exceptionally large margins, large transactions with zero or negative margins, etc. Once a trader booked a deal to STP, control was lost electronically. It had to be released back to trader status for any modification, creating a recorded loop of mistakes, errors etc, trader input errors were zeroed by an equal offset and then re-entered, an auditable trail. IN SHORT desk reporting-tools + trader-designed controls both supplemented any other surveillance being carried out. We assigned a part of compensation pool to be peer-reviewed and GRC- reviewed, taking from under-performers and rewarding innovators and consistent quality providers. Personally, I expected that trader surveillance must acknowledge and reward good behaviour as enthusiastically as it deducts for poor conduct. Winning friends and influencing people: Senior management's job was supported from the desk and GRC, we were a team player. Our communicative competence was high and immediate. We were easy to check both in terms of own and client activity. GRC's job was supported from the desk. We provided checks and balances on everything up to and including available credit capacity or margin amounts owed/due. Surveillance is all about preventing crime, or identifying criminal activity? wrong. It is all about building excellence for a scalable and tractable business model. LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 3 of 4
  • 4. Great surveillance sets a higher bar for competitors and gains client loyalty. To build a surveillance-enabled business is the goal. That requires confidence building within GRC, with senior management and on the trading floor. 孫 http://www.ey.com/Publication/vwLUAssets/ey-trader-surveillance- report/$FILE/EY%20Trader%20Surveillance%20report.pdf 族 https://www.bankofengland.co.uk/-/media/boe/files/report/2018/fair-and- effective-markets-review-progress-report.pdf? la=en&hash=E3F55D5C0600F927F1E767EAA818C4E571E72FD9 続 Always operating in t+1 derivative world, capable of t+x, we summed positions backwards as NPV cashflows and graphed them to show (1) duration, (2) difference from a week ago, and (3) a day ago. A picture tells more than 1,000 words. LINKEDIN CTRM RISKGRID STACK DAVID@RISKGRID.NET +39 347 364-8843 Page 4 of 4