MANAGING VOICE RECORDING IN A REGULATED ENVIRONMENT

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Jacob Berry
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1 MANAGING VOICE RECORDING IN A REGULATED ENVIRONMENT Challenges and Best Practices

2 TABLE OF CONTENTS Introduction Increased Transparency Challenges Voice Recording Platform Administration Challenges Safeguarding the Voice Recording Platform and Process Trade Reconstruction Requirements Conclusion: Voice Recording Best Practices About IPC IPC Managing Voice Recording in a Regulated Environment 2

The maze, much like the new regulatory landscape for financial markets, was riddled with complexity, ambiguity and lots of parallel obstacles to overcome simultaneously.

3 INTRODUCTION The Cretan Labyrinth is one of the most well-known mazes in all of history. It was nearly impossible to navigate and required a dedicated plan and lots of hard work to finally beat it and the mythical creature known as a Minotaur (half man, half bull), that resided there. The maze, much like the new regulatory landscape for financial markets, was riddled with complexity, ambiguity and lots of parallel obstacles to overcome simultaneously. Financial firms must overcome significant operational challenges and resource constraints to meet the voice recording mandates of multiple global regulations. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act has introduced more than 400 new regulations. In Europe, the combination of the Markets in Financial Instruments Directive (MiFID II) and the European Market Infrastructure Regulation (EMIR) will introduce over 200 new regulations. Globally, under directives from the Financial Stability Board, regulators in nearly every global market have started the work of harmonizing rules between their markets and others and have followed the initial leads of both Dodd-Frank and MiFID II. Complying with these regulations has stretched many firms resources to the limit. As a result, firms are utilizing outside experts and implementing best practices to help them navigate through the regulatory labyrinth specific to their business. This e-book provides information related to many of the new voice recording mandates, the operational challenges they present and best practices for meeting them. While we believe this e-book will be of interest to our customers and other financial industry participants, it has been prepared and published for informational purposes only. It is not a full analysis of the regulatory matters presented and is not offered, nor should be construed or relied upon, as legal advice. You should not act or rely upon legal information or interpretation contained in this e-book without seeking your own professional legal advice. IPC Managing Voice Recording in a Regulated Environment 3

INCREASED TRANSPARENCY CHALLENGES The most fundamental change related to new transparency rules is the introduction of mandated voice recording regulations by the United States and the further

4 INCREASED TRANSPARENCY CHALLENGES The most fundamental change related to new transparency rules is the introduction of mandated voice recording regulations by the United States and the further extension of existing voice recording mandates in other global markets. These rules are designed to provide additional transparency to trader communications and will have an increased burden and complexity for financial firms.bfirms will now be responsible for capturing and archiving a wider array of trader communications voice conversations, , IM and SMS. Firms will need to demonstrate that they capture 100% of the voice recordings that the regulations mandate be archived, and retrieved in a timely manner for regulators. These new voice recording rules include many additional layers of complexity subjecting many firms to new or additional requirements around mobile voice recording.bmobile voice recording presents many challenges because of the immaturity of the technology to support it, privacy issues and data security. With voice recording oversight, the challenge isn t just making sure that trader voice communications are being recorded, it s making sure the right individuals across the business, be it traders, portfolio managers, analysts or others are being recorded as per the compliance guidelines. This compliance recording list can change almost daily as people move across asset classes, leave the firm or are hired. Firms have begun to look to third-party and independent vendors to validate their voice recording platforms and infrastructure. Daily health checks can help confirm that their voice recording platform is operational and the calls a firm needs to record actually are being recorded and archived. These checks, optimally conducted prior to the start of each trading day, may include verifying that turret channels are connected and all designated users are correctly mapped to the recording platform, confirming connectivity to the primary server and checking the audio integrity of calls. Firms can then effectively showcase to regulators how they utilize these independent assessments and daily platform health-checks to safeguard their operational efficiency and help them be in compliance. Regulators should look more favorably on firms that provide this level of diligence to their compliance initiatives, which may even translate into time and cost savings. To meet the regulatory requirement of recurring and independent BCP audits, firms are leveraging industry voice recording service specialists that not only can audit their recording platforms, but also will support their ongoing voice recording compliance and platform administration. IPC Managing Voice Recording in a Regulated Environment 4

VOICE RECORDING PLATFORM ADMINISTRATION CHALLENGES Regulatory mandates are causing firms to rethink their approach to voice recording administration.

5 VOICE RECORDING PLATFORM ADMINISTRATION CHALLENGES Regulatory mandates are causing firms to rethink their approach to voice recording administration. Dodd-Frank and MiFID have generated a substantial increase in the amount of work required to administer the voice recording system, including archive management, and most critically, voice recording archive search and replay. Firms are being asked to provide many more voice recording archives for playback, across more of their recorded positions and for longer periods of discovery. This amounts to a substantial time requirement for the IT and legal teams that are normally engaged to facilitate the search and replay needed to both find and validate that the pulled archives are complete and pertinent to the specific regulatory investigation. Proper archive management is critical to ensuring that successful search and replay can be provided for each regulatory investigation. Firms are required to retain recordings for a specific period of time, with retention rules that vary by asset class, by region and even by individual trade. Additionally, while firms are required to retain recordings for a specific period of time, they also want to delete them as soon as each archive meets its required retention timeframe. The process to manage the retention and deletion rules related to the voice recording archives requires deep knowledge of both the regulations and the voice recording technology. Many firms are leveraging voice recording expertise from outside service specialists that can administrate the voice recording platform, work with them to set-up proper retention and deletion rules and coordinate the search and replay to help offset time constraints from their internal IT departments which can result in more effectively managed compliance and regulatory investigations. Firms are utilizing independent auditing of their voice recording retention rules and voice recording archives to help validate that rules they institute meet current or updated retention requirements. Additionally, firms are looking to managed service solutions to help them determine and implement cost-effective data management of their large and ever-increasing voice recording archive databases. IPC Managing Voice Recording in a Regulated Environment 5

6 SAFEGUARDING THE VOICE RECORDING PLATFORM AND PROCESS Safeguarding the voice recording process is top of mind for regulators. Implementing the business continuity plans, system resiliency and operational efficiency that enables the continuous availability and operation of the voice recording platform is a complex challenge for firms. Database and application resilience along with effective capacity planning are essential to ensure the voice recording process continues even when unforeseen incidents occur. Firms need to know if their: Voice recording platform has a resilient database. Most older voice recording platforms don t have that capability fundamental to their architecture. How do firms address this, if that is the case? Archival capacity plans are sufficient to meet the longer retention periods mandated by different regulations Platform supports litigation hold enabling retention periods to be easily extended if required by regulators or compliance In addition, new rules require independent evaluations of a firm s business continuity plan on a recurring basis to further ensure system resilience. As with most of the new regulations, these additional requirements create additional pressure for firms to manage and ensure that they are compliant. Many firms are conducting independent assessments of their voice recording infrastructure to catch and correct deficiencies before they snowball. Outside evaluations bring a different perspective to the analysis and areas of noncompliance. Outside firms also bring a range of experience to the engagement, including how peers are tackling similar challenges. Firms that have gone through an evaluation of their voice recording platforms are beginning to enact plans to transform their current infrastructure to newer systems that support resiliency for voice record capture, application and database redundancy as well as failover capability for long term archival and archive mirroring. Lab certification of products, patches and software prior to their deployment in production better assures they will work as intended and enhance the resiliency of the platform. IPC Managing Voice Recording in a Regulated Environment 6

TRADE RECONSTRUCTION REQUIREMENTS Of all the new regulations, the one mandate that has raised the biggest challenge for financial firms concerns the requirements regarding trade reconstruction.

7 TRADE RECONSTRUCTION REQUIREMENTS Of all the new regulations, the one mandate that has raised the biggest challenge for financial firms concerns the requirements regarding trade reconstruction. Trade reconstruction regulations require firms to piece together all of their archived voice recordings and any , IM, SMS and voice mails related to a transaction to provide a comprehensive and reconstructed view of the entire trade from pre-trade through to post-trade. This requirement may prove to be the most difficult for firms to manage because they will have to extend the breadth of recording across an increasing number of areas of the firm and then determine what constitutes pre-trade activity, which is the subject of debate and open to interpretation. Determining when and where a specific trade was conceived and following it all the way through execution to settlement can be confusing, especially in the case of swaps. These new rules now allow regulators to build a complete audit trail of the trade through all of the mandatorily recorded archives that the regulation require firms to retain. Many firms will find themselves hard pressed to build complete trade reconstructions for even the most straightforward trades and will find it significantly more difficult for more complex and multi-asset trades. As such, firms are already beginning to reevaluate the people, processes and technology needed to meet trade reconstruction mandates. Since most firms lack deeper and more specialized voice recording expertise, it will be burdensome for even the largest firms to try to accomplish this time-consuming and iterative work and essentially impossible for small firms to manage this process based on their resource constraints. Most have already come to the realization that the only way they will be able to meet the burden of responsibility that these new regulations require is to leverage new technology, new processes and specific outside voice recording expertise. Finally, as the number of routine regulatory examinations continues to increase so has the number of playback requests from a firm s legal and compliance function. This increase makes it more burdensome for the business as a whole, and creates additional challenges in terms of managing and containing confidential business-impacting information. Many firms are evaluating different types of analytics solutions that can help scan large data repositories and better determine which written and voice recording archives are needed to reconstruct the trades targeted by regulators. Newer analytics solutions are now available and are better able to provide a view across all of the disparate archives and reach across multiple databases. These analytics platforms do require the expertise to manage the search criteria and understand how to rebuild these trades specific to the requirements of the regulator. Most firms have or will need to rewrite their archival and search and retrieval processes. To do this effectively may require the guidance and supervision of experts outside of their organization that will help them put new processes togetherto be better prepared to meet the challenge. IPC Managing Voice Recording in a Regulated Environment 7

CONCLUSION: VOICE RECORDING PRACTICES Now is the time for firms to evaluate how to meet these new mandates and look at the people, processes and technology they have in place to manage these new

8 CONCLUSION: VOICE RECORDING PRACTICES Now is the time for firms to evaluate how to meet these new mandates and look at the people, processes and technology they have in place to manage these new rules. Historically, the first significant regulatory fine assessed against a non-compliant firm motivates it into becoming a compliant one. Firms that want to break this cycle should adopt a proactive and comprehensive approach to the operational challenges that underpin regulatory compliance and: Audit the existing voice recording environment to identify vulnerabilities, the potential regulatory impact and a remediation plan Incorporate risk mitigation procedures such as daily health checks and the lab certification of products into firm s standard operating procedures Implement rigorous processes to manage the deletion and playback process, as well as access to the voice recording platform Utilize analytics technology to address emerging trade reconstruction requirements Leverage outside organizations with voice recording expertise to manage the voice recording platform and reduce the firm s operational risk Following these guidelines will provide your firm with a set of operational best practices to help you manage through the complexity and maze of recording requirements created by this new and global regulatory landscape. IPC Managing Voice Recording in a Regulated Environment 8

9 ABOUT IPC IPC is a global provider of mission-critical network services and trading communication technology to the financial markets community. With complete focus on this sector and over 40 years of expertise, IPC provides customers with integrated solutions that support traders and participants across the entire trade lifecycle, including sell-side and buy-side financial institutions, inter-dealer brokers, liquidity venues, clearing and settlement firms, independent software vendors, corporate finance departments, financial information exchange providers and market data providers. IPC s offerings include a unified communications/application platform, awardwinning trading positions, managed voice and data connectivity solutions, compliance technologies, infrastructure management and a suite of enhanced service offerings. IPC s global reach extends to more than 60 countries including a network of 5,000 customer sites over 700 cities and an installed base of approximately 120,000 trading positions deployed worldwide. Headquartered in Jersey City, New Jersey, IPC has over 900 employees located throughout the Americas and the EMEA and Asia- Pacific regions. IPC s mission is to continually innovate to support collaboration across the global financial community and address our clients needs in an ever-changing landscape. For more information, visit AMERICAS Corporate Headquarters Harborside Financial Center/ Plaza 10 3 Second Street, 15th Floor Jersey City, NJ T: F: EMEA IPC London Office Tower House Worship Street London EC2A 2DZ, England T: +44.(0) F: +44.(0) ASIA PACIFIC IPC Hong Kong Office 3301, 33/F, The Center 99 Queen s Road, Central Hong Kong T: F: GLOBAL OFFICES North America: Jersey City, NJ (Corporate Headquarters); Alpharetta, GA; Boston, MA; Charlotte, NC; Chicago, IL; Conshohocken, PA; Fairfield, CT; Houston, TX; Los Angeles, CA; New York, NY; San Francisco, CA; Toronto, Canada; Westbrook, CT; Murray Hill, NJ EMEA: London (Main Office); Frankfurt; Milan; Paris; Zürich; Geneva Asia Pacific: Hong Kong (Main Office); Beijing; Jakarta; Kuala Lumpur; Melbourne; Mumbai; Seoul; Shanghai; Singapore; Sydney; Taipei; Tokyo This E-book, which we believe may be of interest to our customers and other financial industry participants, has been prepared and published for informational purposes only. It is not a full analysis of the matters presented and is not offered, nor should be construed or relied upon, as legal advice. You should not act or rely upon legal information or interpretation contained in this E-book without specifically seeking professional legal advice. Copyright 2015 IPC Systems, Inc. All rights reserved. IPC Managing Voice Recording in a Regulated Environment 9

Compliance speaks up. IPC Annual Survey of Compliance Officers across the financial markets ebook. Connecting opportunities.

Compliance speaks up. IPC Annual Survey of Compliance Officers across the financial markets ebook. Connecting opportunities. Compliance speaks up IPC Annual Survey of Compliance Officers across the financial markets ebook www.ipc.com Connecting opportunities Table of Contents Introduction Compliance Raises Its Voice Regulatory