Holistic Surveillance Enablement

Transcription

1 2. Using Voice Analytics to find Compliance Risks ebook - Oct. 2016

2 Table of Contents What do you have to do to be compliant? Audio surveillance in action What can the technology do for you? Page This ebook is the second in a Series of ebooks around Holistic Surveillance Enablement that will include: 1. Increasing Efficiency and Effectiveness of your Surveillance Program 2. Using Voice Analytics to find Compliance Risks 3. Protecting against Market Abuse and Misconduct Risk 4. Detecting Compliance Risk in Advance by Analyzing Trader Behavior To view the corresponding recorded Webinar on each topic go to:

3 What do banks have to do to be compliant? Existing regulations Dodd-Frank Wall Street Reform and Consumer Protection Dodd-Frank is fully in force since August In addition to the headline regulatory changes covering capital investment by banks and insurance companies, the Act introduces new regulation of hedge funds and private equity funds, alters the definition of accredited investors, requires reporting by all public companies on CEO to median employee pay ratios and other compensation data, enforces equitable access to credit for consumers, and provides incentives to promote banking among low- and medium-income residents. The new Rules include new recordkeeping and risk-management processes within affected firms, including the recording of conversations which include any re-execution trade information. Once effective these rules will impose significant challenges to risk managers and compliance professionals at affected firms. In order to meet their regulatory obligations, firm s must consider the variety and complexity of new requirements and the technological challenges inherent in record creation and maintenance, as well as surveillance oversight related to the retention of required records. MAR - Market Abuse Regulation Effective since July 2016 it stipulates keeping records of all telephone and electronic communications. Reason is that this may establish the identity of a person responsible for the dissemination of false or misleading information or that persons have been in contact at a certain time, and that a relationship exists between two or more people. In practice this means you have to Record all communications of Direct Market Participants (Brokers and Dealers) and be able to identify intent related to a event and actions behind the event. MiFID II - 2nd revision of Markets in Financial Instruments Directive MiFID II will come into force in January 2018 and requires to record and monitor all communications to detect market abuse. Reason is that records of communications constitute crucial and often the only evidence of client relationships and verify compliance and prove and detect market abuse activities

4 What do banks have to do to be compliant? New regulations are on the rise FX Global Code - Foreign Exchange Working Group (FXWG) EBR - European Banking Regulations Retention requirements for various types of communications, including correspondence between submitting parties and others (e.g. internal and external traders and brokers, rate administrators, or calculation agents) in determining submissions. Requirements for records to be retained in secure, tamper-proof mediums that allow them to be accessible for future reference, and with documented audit trails. Broader requirements for control frameworks against potential market abuse conduct, including requirements for controls to prevent improper communications regarding submissions. Requirements that submitters regularly review interactions with respective administrators. Requirements that submitters review sample records of voice communications. Requirements to conduct submission related business on recorded electronic and phone communication systems (as opposed to personal devices or systems). Common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market1 (FX Market). It is intended to promote a robust, fair, liquid, open, and appropriately transparent market in which a diverse set of Market Participants, supported by resilient infrastructure, are able to confidently and effectively transact at competitive prices that reflect available market information and in a manner that conforms to acceptable standards of behavior. The Global Code does not impose legal or regulatory obligations on Market Participants nor does it substitute for regulation, but rather it is intended to serve as a supplement to any and all local laws, rules, and regulation by identifying global good practices and processes. SEC Business Conduct Standards The final rules require security-based swap entities to comply with a range of provisions designed to enhance transparency, facilitate informed customer decision-making, and heighten standards of professional conduct. For example, security-based swap entities are required to deal fairly with potential counter-parties by communicating in a fair and balanced manner, disclosing material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest, and adhering to other professional standards of conduct. Additional requirements will apply for dealings with special entities, which include municipalities, pension plans, endowments, and similar entities. The rules also establish supervision and chief compliance officer requirements. In addition, the rules address the cross-border application of these requirements and the potential availability of substituted compliance.

5 What do banks have to do to be compliant? Communication trends Market Color These communications are not properly aggregated or anonymized. It is inappropriate to communicate or solicit information related to an individual flow or related to a specific Client, to associate individual flows with a Client directly or using code names, to discuss intention to trade at specific levels, or suggest an intention to disrupt the market RFQ s Requests for quotes These communications need to be identified for regulatory inquiries around pre- trade conversations and the capture and separation of such communications versus other normal business activities. MiFID II Update 10 October 2016 Q& A from ESMA on recording of telephone conversations and electronic communications NICE White paper NICE commissioned OMC Partners to examine 10 major banks in the investment banking community on their approach to communications surveillance. Download the Q&A and White paper from

6 Audio surveillance in action Use case of Communication Surveillance Background A large global financial institution had a regulatory inquiry requesting a significant amount of communications data to be collected, reviewed, and submitted. A major challenge for any institution, adding the fact that the firm was not fully aware of exactly what the regulator was looking for. The Process Using historical methods, which are mostly manual, the firms set out to gather and understand the information before handing it over to the regulators. This process took them over 480 business days, with the full help of a compliance team of over a dozen people. Upon completion, they identified multiple issues and were able to provide the regulator what they needed. The Problem 480 business days, that is just shy of 2 years. So, if you look at this from a compliance perspective, they were unaware of what was happening to begin with for the previous years before the regulatory inquiry, and it took them another 2 years to fully understand what was happening within the time frame requested. As you can imagine, the regulatory body conducting this investigation was not happy at all of the time it took for a response, and when they finally received the requested data, what was found. The resolution After completing the inquiry, the firm identified that it need a better process. They turn to Nice and our Communication Surveillance offering. Working with the same data set, we aggregated all of the data, organized and managed, and analyzed with our out of the box risk models. This whole process, which was fully automated was completed within 24 hours of ingestion. The Findings The institution, assigning just 1 analyst, was about to find 70% of all the risky data within the first 30 minutes of searching with Communication Surveillance. That Same person completed the entire process in just 3 business days with an outcome similar to the one that was discovered doing the manual process. The Benefit This financial institution was able to come to the same conclusion as the labor intensive manual process in just 3 business days with one person versus 480 business days with a team of individuals. That equates to a new process that is 160 times faster. This would have enabled the firm to save millions in costs for the actually process if I had Cs already in deployment. It also would have been able to reply to regulators extremely faster and knowing exactly what was given over beforehand. The last and final benefit and the biggest one: If the institution had been using Communication Surveillance from the beginning, the inquiry, the effort and the hefty fine could have been potential prevented.

7 What can the technology do for you? Voice Surveillance.where do you start? A quick search in the voice communciations can already find many cases of recommendations being discussed that are not allowed.

8 What can the technology do for you? Understanding Voice Communications Voice is 100% unstructured and it is recorded with analog signals (natural) Crossover & Speed of Talk Languages and Dialects Data to train algorithms is limited in the open domain 50+ dialects in the UK Special Voice Jargon No spelling issues Except for the Queens English Chat & is semi structured and it is digitally recorded No Crossover or pronunciation issues Languages A lot of data to train in the open domain Very limited dialog difference (spelling variation) Special Chat Jargon and Abbreviations Spelling Issues Service quality, new sales opportunities and customer information Skilled employees (not highly educated) 1-2 Communication channels Languages in queues Clear structured language 1x Desk Phone Supervision, risk prevention and reconstructing events. Very high skilled (trader language) 8-12 Communication channels Multilingual Fast unstructured trader specific language 2x Turret Handsets & 8:1 Speaker Mixing potentially with TV

9 What can the technology do for you? Phonetic Indexing Find Words and Phases after the Sound of the Written Word Limitations is that you can NOT use phonetics to data mine but it is a good tool for search Speech to Text (STT) Tries to Transcribe the most probable sentence of a voice Limitation is inaccurate to search on but good to data mine and dictionary based Hybrid Approach Uses Phonetics for search and Speech to Text to data mine Limitation are the costs of IT, Scalability NICE Communication Surveillance Uses new kind of text algorithms to search on NLP output of STT. Advantages: fast search, advanced search and multiple option search Advantages: data mining on same set and consistency Limitation: the method is dictionary based but algorithms are used to catch out of vocabulary words Voice Surveillance is about with limited time and effort to find them finding the highest priority calls

10 What can the technology do for you? You need to be able to find relevant information quickly Voice communication is one of the most complicated media to manage Traditional Approach Holistic Approach How do you search everything? People do not speak the same, similar meaning can be said very differently. There is a huge amount of noise, irrelevant conversations mixed with relevant information. Technology can help ignore the noise and find what you need to look at. Voice Surveillance is about efficiently highlighting calls of interest automatically to the correct person. NICE Voice Models already in use by customers: FX Surveillance Collusion Detection Bragging Identification Rate Setting Monitoring Secretive Discussions Manipulative Behavior Personal Benefits Conflicts of Interest

11 What else can the technology do for you? All interactions are indexed using Interaction Extraction and a Categorization Process (Analytic Process): After finding one call, the system can find related calls with a Reconstruction Process (Search Process):

12 Summary Voice surveillance is become an industry norm as the latest rules and regulations are putting pressure on the financial service industry to close all the gaps that could potential expose them to fraudulent behavior. With this growing demand to surveil and monitor additional voice communications, firms must be able to turn to voice analytics to help ensure that they meet the demanding regulatory requirements. These are the main topics to consider to enable a holistic approach to compliance: How can you manage voice calls to make them searchable and understandable. Which technology tools can you use to help find what you need quickly and efficiently. How can you automatically highlight call of interest and push to people for review. For more information on Holistic Surveillance visit us at or us at HolisticSurveillance@nice.com