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In an era of increasing regulatory scrutiny, trading controls have become a focal point for banks around the globe. It has been over two years since the UK Prudential Regulation Authority (PRA) released SS5/21, a document focused on the supervision of international banks’ branches and subsidiaries. Sections within it laid the groundwork for intensified examination of trading control frameworks, specifically trader mandates, booking model controls and client readiness to trade.
At the core is banks' ability to ensure compliance with regulatory and policy requirements through robust preventative controls (both hard and soft blocks) and to systematically evidence that these controls are applied at a granular level.
Here are key lessons learned:
1. Prioritise Trading Controls, Regardless of Size: Soon after the publication of SS5/21, many banks believed that previous investments in compliance would suffice for new expectations. Smaller banks with modest UK presence also thought they could avoid prioritising investment in this area. It’s now clear that, irrespective of your size, regulators expect all firms to invest in effective preventative measures.
2. T0 Detective Controls Are Not Sufficient: Previously, banks believed that T0 detective controls (controls that identify issues after a trade is executed but on the same day) would suffice. However, preventative controls are designed to prevent non-compliant trades from occurring at all. It’s clear that true preventative controls to block non-compliant trades pre-execution are now required.
3. Data Quality Should Not Delay Implementation: Clean data is essential for making consistent and accurate trading control decisions, but it should not be used as an excuse to delay upgrading infrastructure. Firms should invest in a decision engine to identify and address data issues systematically, starting with "soft blocks" and transitioning to "hard blocks" as data accuracy improves.
4. This is Just the Beginning of Regulatory Scrutiny: The pre-trade regulatory scrutiny we've seen over the past two years is not a fleeting phase; it's the start of a new, enduring chapter. Firms need a scalable, adaptable decision-making infrastructure to handle evolving requirements efficiently. A unified decision engine simplifies compliance and reduces costs.
5. Choose the Right Partners: Given this environment, it is crucial for banks to engage with the right mix of consultants, vendors, and industry forums. Firms should select partners with expertise, regulatory knowledge, and comprehensive solutions.
6. Start Implementation Without Delay: Whether you adopt a "narrow and deep" or "wide and shallow" approach, firms should begin implementation immediately. A clear end-state vision and proactive action are crucial. Delaying action increases regulatory risk.
Conclusion
The lessons learned highlight the need for proactive investment in this area. By prioritising trading controls, securing senior management buy-in, engaging the right partners, and starting the implementation process without delay, firms can position themselves to navigate the complexities of regulatory compliance effectively.
The journey towards enhanced trading controls is not just a regulatory necessity, but a strategic imperative. Firms that take a proactive approach and invest in scalable, adaptable solutions will be better equipped to meet current and future regulatory demands, ensuring long-term success and resilience.
By Craig Butterworth, Chief Commercial Officer at Droit
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