W4: Remote Trading Supervision

Transcription

1 W4: Remote Trading Supervision The importance of a strong oversight model The European Compliance Conference Warsaw 19 April 2018

2 Introductions Julian Marsh Partner Ernst & Young LLP Mark Goulden Global Head of Markets Compliance Deutsche Bank Caroline Leckie CIB Regulatory Compliance Deutsche Bank 1

3 Remote Booking business models are coming under increasing scrutiny Definition - Use of an entity (branch or subsidiary) based in a different location from that where the business is being conducted In practice there are a variety of different models across organisations / locations and these often vary by business area / asset class Expanded focus includes conduct and compliance risk 1 st Line Supervision Historically primary focus was on financial risk Pre-trade activities inc Client Onboarding Relationship Management and Sales Structurers / Marketers / Sales-Traders Traders / Risk Managers Booking entity 2 nd Line functions Compliance, Risk, Operations, Finance, HR etc Change management New Product, New Business, Complex Trades 3 rd line Internal Audit 2

4 While Remote Booking has clear financial resource and operational benefits, it does introduce additional risks and regulatory complexity Business Rationale / Benefits.. Additional Complexity. Optimisation of financial resources: Collateral management / client netting Hedging efficiency Back to back trade elimination Operating efficiency through centralisation: Critical mass of teams, centralising talent / reducing key person dependency Economies of scale through process standardisation Improved controls in hubs A Remote Booking model introduces additional risks over and above those in the home location, specifically: Need to satisfy the requirements of both on and offshore regulators Variances in understanding / awareness of different market practices Differing cultural and behavioural standards Lack of physical proximity and differing time zones Split of roles & responsibilities, in particular hand off s A number of market drivers are pushing causing organisations to review their booking models: Brexit Loss of passporting resulting in a requirement for a physical presence Banking segregation UK Ring Fencing, French Banking Segregation, German Banking Separation Act, US Volcker and others.. Other factors - including US tax reform, resulting in the potential transfer of some business back to the US. In addition, there is an expectation that any booking models must support operational resilience, including an orderly wind-down and / or resolution should this be required.

5 1 st line supervisory arrangements is an area of particular focus.. Outlined below are some examples of the arrangements organisations have in place Definitions B P L R Booker Trader / Salesman / Marketer Primary supervisor Direct functional responsibility Local supervisor Same location as trader / salesman Remote supervisor Located in booking location Legal Entity Location Regional Management Hub Remote location A - Local Primary Supervisor B R P L B - Remote Primary Supervisor P R C - Regional Primary Supervisor B B B R P D Global Book Rolling Supervisor L L L B Timezone transfer P R Considerations: Are the booking models, rationale and risks understood? What are the regulatory expectations, including booking and remote locations? What are the supervisory arrangements and how are these framed and communicated across different locations? Is the requisite MI in place to support the discharge of supervisory responsibilities?

6 Remote Supervision Case Study: Financial Crime control failure Background Bank had salesman and traders based in the Moscow office booking into the London Branch A Russian client was booking mirror trades between two entities thereby circumventing AML controls Over 2 ½ year period converted USD6bn from RUB into USD Following an investigation the bank paid a GBP163m fine for AML control failures Control Weaknesses / Failures 1. Client on-boarding failed to identify relationship between two entities 2. Moscow based Front Office staff had different interpretation of what were deemed permissible activities. 3. Failure to identify and follow up suspicious transactions 4. Local supervisory concerns not followed through Pre-trade activities inc Client Onboarding 1 2 Relationship Management and Sales 1 st Line Supervision Structurers / Marketers / Sales-Traders Traders / Risk Managers 2 nd Line functions Compliance, Risk, Operations, Finance, HR etc 4 3 Booking entity Change management New Product, New Business, Complex Trades 3 rd line Internal Audit

7 Remote Supervision Case Study: Mis-marking Background Bank had Asia based traders remote booking ETF s on underlying Chinese securities into a European based entity Due to investment restrictions, the ETF s trade at a market price greater than the sum of the value of the underlying securities. Trader create new ETF s to meet fictitious client demand and then marks up the inventory by transferring from an onshore to offshore book. USD10 s million P&L write down Control Weaknesses / Failures 1. Local trader was able to create, book and mark up ETF s locally without adequate local supervision 2. Whilst strictly following their procedures, Finance and Risk did not understand the dynamics of the local market and therefore not alert to the trader s errant activities 3. Book was subject to a restructuring without appropriate changes to MI 4. Timing and weak communication compounded the issue 1 st Line Supervision 1 4 Pre-trade activities inc Client Onboarding Relationship Management and Sales Structurers / Marketers / Sales-Traders Traders / Risk Managers 2 nd Line functions Compliance, Risk, Operations, Finance, HR etc Change management New Product, New Business, Complex Trades 2 3 Booking entity 3 rd line Internal Audit

8 Remote Supervision Case Study: Market Conduct Background Two equity sales-traders: One in HK and one in Tokyo. Remote booking into London with most trading undertaken outside of UK working hours Certain equities are thinly traded with lower liquidity Sales trader in HK is submitting spoof cash equity orders to manipulate the market price and then cancelling these Colluding via WhatsApp with the second sales trader in Tokyo who is trading CFDs on the underlying equity in a London book and benefiting from the manipulated price Control Weaknesses / Failures 1. Sales trader was using mobile phone on the trading desk and not prevented from doing so 2. Difference in working hours meant trades were not visible to remote supervisors on a live basis and cancelled order data was not followed up adequately or in a timely manner 3. Cancelled orders not followed up in sufficient detail 4. Compliance in the booking locations were underresourced and not sufficiently senior to challenge the front office. 5. Insufficient visibility of all data points across multiple books and products limited the ability to join the dots 1 st Line Supervision 2 5 Pre-trade activities inc Client Onboarding Relationship Management and Sales 1 Structurers / Marketers / Sales-Traders Traders / Risk Managers Booking entity 2 nd Line functions Compliance, Risk, Operations, Finance, HR etc Change management New Product, New Business, Complex Trades 3 rd line Internal Audit 4 3

9 While there is little formal guidance, there is broad consistency on regulatory expectations, albeit their approach and focus will vary Clear Booking models and practices Clear, transparent and coherent booking structures, with logical business rationales Alignment of risk taking with P&L recognition and B/S usage Where unclear, legacy booking practices / rationale should be understood Any booking model must not impede a potential orderly wind down and / or resolution Controls and standards Ensure core control framework is operating effectively before accepting remote risk Understand incremental challenges of remote booking management and ensure these are factored into the design of the control framework, upon which greater formal reliance will be placed Booking entity management must have the authority over the risks it accepts, including the right of veto this includes significant transactions, new products and business Ensure understanding of regulatory requirements / restrictions including licenses / permissions and the ability to interact with clients cross border as required Manage inter-location / entity transactions to the same standards as external ones

10 Key elements of a remote booking supervisory framework Governance and Supervision Clear understanding of rational for remote booking Understanding of risk profile, including suitable mitigation of incremental risks Clarity of roles & responsibilities, in particular hand offs between local and remote supervisors End to end controls and standards Consistent design and execution of core controls across all geographies Additional controls to meet any local / entity specific requirements and / or to mitigate additional Remote Booking risks overlaid End to end assurance and testing framework to provide management comfort Definitions and population capture Clarity on which assets are subject to Remote Booking controls Clear understanding of location of end to end processes / controls for each business area linking to trading / risk mandates Clarification on which activities / roles are in / out of scope (sales, marketer, traders etc..) Supervisory reporting, MI, process and Data MI content suitable to support supervisory individuals and fora MI includes financial (P&L, B/S), risk and nonfinancial risks, with link to individuals and books Classification by entity / location to support remote and home regulatory expectations

11 Contacts Julian Marsh Partner Ernst & Young LLP 25 Churchill Place London E14 5EY +44 (0)

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