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Transforming Surveillance in an Uncertain World 

The pandemic has disrupted the trading model, compounding the complexity of pre-existing macroeconomic and client drivers and leading to greater ecosystem risks in areas such as conduct and cyber security. Accenture is positioned to provide immediate support to help organizations respond to the virtual trading floor implications from the pandemic crisis. Review our presentation to learn more about surveillance transformation approaches. 

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Transforming Surveillance in an Uncertain World 

  1. 1. July 2020 Transforming Surveillanceinan UncertainWorld
  2. 2. Industry Backdrop
  3. 3. MACROECONOMIC TRENDS CLIENT DRIVERSECOSYSTEM Industry Context and New Market Trends The pandemic has disrupted the trading model, compounding the complexity of pre-existing macroeconomic and client drivers and leading to greater ecosystem risks in areas such as conduct and cyber security “Will the Virtual Trading Floor become the New Reality?”2 “Surveillance of Homebound Wall Street Traders Relies on Pen and Paper”1 “Managers turn to surveillance software, always-on webcams to ensure employees are (really) working from home”3 “Compliance Is An Issue For Remote Trading And Investing Firms”4 Firms needing to “bend the cost curve,” with risk and controls a key area of focus Focus on exploiting advances in artificial intelligence (AI) and analytics to reduce cost to serve and increase process quality Continued regulatory expectations on conduct, consumer protection and cybersecurity Prioritizing protection of assets given market turbulence Seeking diversification in investments to mitigate risks (e.g., new technologies) Strengthening risk management techniques to reduce potential trading and / or transaction errors Though ecosystem risk has been compounded, leading surveillance programs have opportunity to emerge with a healthier cost base, a more holistic set of surveillance tools and new ways of working 1 https://www.wsj.com/articles/taking-notes-the-challenge-of-recording-trades-while-working-from-home-11585565630 3 https://www.washingtonpost.com/technology/2020/04/30/work-from-home-surveillance/ 4 https://www.gfmag.com/magazine/april-2020/compliance-remote-trading-investing Sources Illustrative 2 https://www.globalbankingandfinance.com/will-the-virtual-trading-floor-become-the-new-reality/ Wall Street Journal Washington Post Harvard Business Review Global Banking & Finance Review
  4. 4. Regulatory expectations regarding controlled access to information, surveillance and effective audit trails have remained broadly consistent, though more complex to enforce in an era of virtual trading AREAS OF FOCUS Maintain communications within a controlled environment, for example prohibit use of personal devices and provide information security of non-work standard communication platforms Maintain complete and timely recordkeeping to meet lookback analysis and heightened compliance expectations (e.g., U.S. Consolidated Audit Trail) and minimize paper-based notes and references Enhance detection capabilities (e.g., use of video surveillance or virtual reality) to detect potential conduct risks Use virtual barrier to detect MNPI data and surveillance controls intended to block the exchange of information between departments that may result in business activities with conduct and / or legal risk Implement and raise awareness of remote work standards (e.g., pop-ups, online training) including secure home network security settings and use of data collaboration tools; review screensharing protocols REGULATORY EXPECTATION Recording of internal and external trading communications Audit trail of transactions Control access to material non-public information (MNPI) Restriction of access to trading information Appropriate due diligence of oversight and access 1 2 3 4 5 Monitor and implement detection, for example monitor employees signing in to networks from personal devices or abnormal locations, and inadvertent exposure of client information to cloud-based applications (e.g., personal email) Replicate the office environment, for example use face-to- face video conversations in place of hands-on supervision, and monitor trade execution instructions and client communications to detect red flags as per business as usual (BaU) Use of advanced analytics techniques to parse alert flow given the impact of market volatility, as well as to inform any increase in the frequency of attestation processes Close any potential gap of understanding with regulators by using company proprietary trading applications to maintain a digital record and remove paper trails, prioritizing date / time of calls, location of calls, solicited bids / offers, etc. Detect market manipulation, monitor and analyze trading and market activity, such as voice, e-comm, and (P&L) information to help detect insider dealing and misuse or disclosure of MNPI OPPORTUNITIES TO ADVANCE CAPABILITY Regulatory Areas of Focus and Opportunities Copyright © 2020 Accenture. All rights reserved.
  5. 5. Virtual trading environments amplify six key risks of misconduct, notably the threat of collusion and insider trading, with the likelihood of regulatory lookback and testing of trade data raising the stakes for effective surveillance Collusion and Schemes of Arrangement Increase in unmonitored communication among traders in chat rooms, as discussions pushed from monitored media to less frequently monitored channels (e.g., instant messages) Threat of Possible Fraud During a downturn in the economic cycle, fraud schemes such as market manipulation, pump- and-dump, Ponzi schemes may increase due to the pressure to maintain commissions Potential Insider Trading Activity A less frequently or consistently monitored environment facilitates potential employee engagement in higher personal securities transactions, and market timing activities Risk of Investment Suitability and Improper Advice Surveillance monitoring and “red flags” of unauthorized trading in a non-discretionary account, unauthorized transfers or uses of funds, or placing a customer in unsuitable securities to generate commissions Inherent Risk level With the potential for regulatory “lookback” and testing of trade data during periods of remote work, financial organizations are re-evaluating their detection capabilities and supporting data and technology architecture Inappropriate Client Relationship Management Risk of investment professionals from engaging in off- market transfers, not acting on behalf of client interests and proper fiduciary responsibility, or not providing full disclosures to clients of the impact of market activity Copyright © 2020 Accenture. All rights reserved. Elevation of Six Key Misconduct Risks Unauthorized Discretionary Trading Increased risk of an investment adviser executing trades in a customer or investor’s account without proper permission or authorization
  6. 6. Transforming Surveillance in an Uncertain World
  7. 7. Four Potential Macro Scenarios The near-future is still uncertain and firms should think about the possible impacts of four scenarios 1. Rapid Remission The disease is contained, and life returns to normal swiftly. Government measures work quickly to stabilize the economy. 2. Flattened Curve The rate of infections is slowed but does not go into remission. The economy shrinks in near permanent ways. Society bends but does not break, pulling together to sustain government measures. 3. Cyclical Outbreaks Infections are controlled in past locations but spread to new hot spots and rebound in old. Patience wears thin with social distancing, opening societal fissures. 4. Prolonged Chaos Effects to control the virus seem useless. Governments and societies are strained to the point of breaking. The economy is limited to necessities only and inflation soars. Source: Accenture Research analysis. 7 Infection outbreaks due to uncooperative elements Non-compliance on two fronts The rate of inevitable infections is slowedInfections are rapidly isolated until absent
  8. 8. Bad actors don’t often leave a trail of evidence behind – in addition to technology solutions, surveillance investigators require the right bank-wide processes in place to detect, respond, and resolve potential misconduct Key Questions to Address Key Questions To Address Leading Practices Controls Framework Data Technology ▪ How do supervisory officer behaviors and cadence evolve to maintain oversight capability? ▪ What processes are required so that the surveillance program is executed properly and continually improved? ▪ Clear definition of surveillance controls, processes, and roles and responsibilities across the three lines of defense ▪ Ongoing tuning and review of compliance procedures on false positives, suspicious behaviors target list and changes to regulatory expectations ▪ What information is available and captured by surveillance platforms or other tools? ▪ How can firms draw the right relationships between available data points? ▪ Assessment of data integration for a 360 supervision by integrating disparate data sources ▪ Business requirements and high data quality as baseline to effectively execute surveillance complemented with AI ▪ What compliance tools are fit for purpose and what accelerators may be required to monitor trading and communication activities effectively? ▪ How can firms take advantage of disruptive and AI capabilities to monitor trading activities in virtual environment? ▪ Compliance ecosystem realignment and definition of technology blueprint for both local and virtual trading environments ▪ Design and implementation of surveillance policies extending them to unsupervised and supervised machine learning provided by proven technologies 8
  9. 9. Effective Surveillance Across the 3 Lines of Defense Effective surveillance requires orchestration across the three lines of defense, with each needing to play their role in mitigating misconduct risks such as collusion 9 Control Data Tech 1st Line Of Defense 2nd Line Of Defense 3rd Line Of Defense Providing independent assurance of operations and oversight groups Executing trades per client direction and within control parameters Monitoring and enforcing guidelines and identifying exceptions ▪ Is trading activity per customer guidelines? ▪ Are regulatory guidelines on best execution being adhered to? ▪ Is there assurance on trading communication surveillance? ▪ Were trade instructions recorded? ▪ Are digital trade communications available for comparison to actual trade executions? ▪ How do we monitor so that employees are not transacting client trade orders outside of compliance monitoring protocols? ▪ Were there any gaps as per identified client trade orders and executed prices? ▪ Was there an audit sampling conducted on all client order program trades sent to the trading desk for execution? Key questions Key questions Key questions Case Study: Supervisory Officer Case Study: Compliance Officer Case Study: Internal Auditor ✓ Establish escalation triggers across lines of business (LOB) ✓ Implement LOB management controls ✓ Stand up supervisory LOB product teams ✓ Define key risk and performance indicators (KRIs / KPIs) across trading desks ✓ Define surveillance rules and procedures based on comprehensive list of misbehaviors and risks in local and virtual environments ✓ Implement alert escalation process and red flags to allow early identification of risk ✓ Identify team groups and relationships more likely to act in collusion ✓ Assess escalated alerts, false positives and missed cases for rule recalibration / tuning ✓ Ongoing testing with new misbehaviors due to a more virtual and digital environment
  10. 10. EMPLOYEE Personal Account Trading Political Contributions Outside Business Activities Large Holdings Voice eComms Social Media Video Trade Surveillance Financial Crime Licensing and Registration Remote Internet Access 3rd Party Access Conflicts Clearance and Control Room Policies and Training Gifts and EntertainmentBankruptcy Filings Private Investments Sub- contractors Conduct Sales Practices HR Data EXTERNAL PARTIES CLIENT Holistic Surveillance for an Effective Detection Effective mitigation of risks demands that compliance and control groups join the dots across a number of interconnected parties and use cases Control Data Tech ▪ The target state is an effective integration of data at scale from multiple sources, across product lines, portfolios and geographies, and using AI and machine learning is helping global banks create an “analytics supply chain” ▪ Organizations are seeking surveillance based on data and analytics platforms to serve up connected and contextual data across the enterprise which can lead to more informed answers, greater insights and ability to reconstruct entire trades 10
  11. 11. Controls Technology Blueprint Leading financial institutions are allowing their technology estates to deliver the holistic surveillance required in a virtual world through analytics, specialized applications and intelligent automation, and supported by an advanced data processing core 11 Complex Event Processing (CEP) Engine Big Data Core (e.g., Apache™ Hadoop®) In Memory Analytics Query Engine CEP Cache Distributed Cache In-Memory DB Workflow Alerts and Notification HBase Data Storage on HDFS Service Layer Interface Internal and External Data Sources Compliance Portal Employee Portal Management Reporting Regulatory Reporting Internal Reporting Analytics User Interface ( UI) / Dashboard UI (tablets / phone friendly) Applications Personal Account Dealing App Outside Business Interest App Gifts and Entertainment App Control Room App Policy and Training Tool Risk Assessment Tool Whistleblowing App Reg Change Tracking Tool Horizon Tracking Tool eComms Surveillance Audio Surveillance Social Media Surveillance Trade Surveillance Payment Screening Tool Sanctions Screening Tool KYC and PEP Screening Tool Suitability Commentary ▪ Analytics UI provides flexible review capabilities that allow selective / holistic views and simple manipulation of aggregated data through analytics (e.g., slicing of the application output and sentiment analysis to drive escalation) ▪ Specialized applications to transform operational capabilities to execute functional tasks to manage system / human workflow integration ▪ An advanced data processing core underpins the above functionalities and provides sufficient storage to store all auditable evidence (e.g., surveillance applications identify sharing of MNPI, with AI able to accelerate data mining and understanding of relevant patterns) ▪ Intelligent automation to connect the dots to provide insights across disparate data sources and reduce manual processes related to data aggregations (e.g., comms on clients’ orders and bid-ask spreads across emails, instant messaging, text messaging, social media, …) Control Data Tech KYC: Know Your Customer PEP: Politically Exposed Person
  12. 12. Tactical turnarounds to extend existing surveillance solutions that require process and control enhancements Three Surveillance Transformation Approaches The traditional way of operating in the Surveillance function has lagged on effective controls, data management and technology which doesn’t cover short and long term business needs. Three transformation approaches can change this trend Enhance Existing Capability Invest in Proven Techs Integrate Isolated Functions Address technology gaps to bring notable advancements in detection, investigation and reconstruction surveillance capabilities 360 supervision to reduce false positives significantly and improve proactiveness of the Surveillance function to anticipate misbehaviors or misconduct risks 12
  13. 13. How can Accenture help? Accenture is positioned to provide immediate support to help organizations respond to the virtual trading floor implications from the pandemic crisis. Below are indicative areas where we can help COVID-19 Banking: Navigating the human and business impact of COVID-19 Subject Matter Advisors “On Demand”: Support for regulatory assessment, industry benchmarking and change planning Program Support: Dedicated team to assess, recommend and implement program enhancements Service Delivery: Delivery of new surveillance methods as-a-service, with advisory support as appropriate Challenge Solution Support 13 Control Reviews and Look Back Existing monitoring controls are typically not prepared to allow remote working on an enterprise scale and require “stress testing” Provide support for: ➢ Technology architecture review and planning ➢ Process and technology control evaluation ➢ Remediation support Platform Implementation and Service Delivery Analytics and more advanced techniques (e.g., Virtual Reality) can get de-prioritized in the move to remote and focus on continuity planning Provide support for: ➢ Selection of preferred vendor platforms ➢ Proofs of concept ➢ Implementation ➢ Service delivery Regulatory Compliance Validating conformance to regulatory requirements during remote working and confirming procedures are in place to hold traders to account Provide support for ➢ Regulatory analysis and recommendations ➢ Policy and procedure review ➢ Training updates
  14. 14. Contacts Samantha Regan Managing Director Accenture Strategy & Consulting Global Reg and Compliance lead samantha.regan@accenture.com Robimon Varughese Senior Manager Accenture Strategy & Compliance Technology Lead - Reg and Compliance robimon.varughese@accenture.com Ben Shorten Managing Director Accenture Strategy & Consulting Compliance & Privacy benjamin.j.shorten@accenture.com
  15. 15. TRANSFORMING SURVEILLANCE IN AN UNCERTAIN WORLD About Accenture Accenture is a leading global professional services company, providing a broad range of services in strategy and consulting, interactive, technology and operations, with digital capabilities across all of these services. We combine unmatched experience and specialized capabilities across more than 40 industries – powered by the world’s largest network of Advanced Technology and Intelligent Operations centers. With 509,000 people serving clients in more than 120 countries, Accenture brings continuous innovation to help clients improve their performance and create lasting value across their enterprises. Visit us at www.accenture.com Disclaimer This presentation is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this presentation and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.

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