(7 min read)
Regulatory complexity has exploded in the dozen years since the Global Financial Crisis. Massive new regulations, from Dodd-Frank to EMIR to MiFID II, have been brought down on the financial markets with increasing frequency and severity. The SEC set records last year with the highest number of enforcement actions against public companies in a decade, and the CFTC recently signaled it plans to move more in-line with the SEC.
The forex market has certainly felt the effects of these massive waves of regulatory change. Affected in areas as widespread as price transparency and order execution to trade reporting and business conduct rules, FX traders now live in a world where, for any given transaction, they risk higher non-compliance fines for the regulations they know about, and also risk not knowing about all of the regulations that may apply.
But FX traders don’t have to feel stuck between a rock and a hard place. RegTech — or, regulatory technology — provides solutions to these exact issues.
In this article we’ll dive into what RegTech is and how its solutions can revolutionize regulatory compliance for FX firms.
What is RegTech?
In its simplest definition, RegTech is the application of technology to improve the way we manage regulatory compliance. RegTech companies are employing machine learning (ML), natural language processing (NLP), blockchain, AI, and other technologies, in an attempt to streamline compliance processes, increase efficiencies, and lower costs and risks.
The FX marketplace is no stranger to the transformative power of technology. After all, it was technology that expanded FX from the trading desks of the few to the smartphones of the many.
Now, Technology has developed to the point where it can take over some of the more labor-intensive aspects of regulatory compliance to produce more accurate results and at a lower cost.
READ MORE: What is RegTech and Why Does it Matter?
How is RegTech changing the FX industry?
RegTech solutions can be segmented into three categories: point solutions, workflow management, and knowledge automation. Each group is already making a profound impact on FX.
Point Solutions
Point solutions solve one specific regulatory compliance need. While more limited in scope than workflow management and knowledge automation solutions, the right point solution can have a powerful impact on an FX firm’s processes.
Here are just a few point solutions that can help the FX market:
- Electronic identity verification tools to streamline and automate laborious Know-Your-Customer procedures
- Anti-money laundering tools that can automatically flag suspicious transactions and dubious trading behaviour at a scale and speed not possible for humans
- Reporting solutions to streamline the heavy burden created by MiFID II transparency requirements
- Voice-to-text translation technology which decipher complex trader jargon and convert it to text, creating a searchable database which ML algorithms can then crawl to identify problematic transactions or trends
- Data aggregation tools to collect instant messaging, email, and phone call data in a single place in order to better monitor for market abuse and to help meet regulatory requirements
Workflow Management
Workflow management solutions — specifically, governance, risk management, and compliance (GRC) platforms — are intended to help solve operational risk management needs. This may mean improving communication between team members, creating a better audit trail, providing a platform to reconcile obligations against policies and procedures, etc.
At their most basic level, GRC platforms act as a container, much like a customer relationship manager (e.g., Salesforce, Oracle, etc.,). They are known for their extreme flexibility, allowing users to customize the experience to their needs, but the specific components of each GRC platform helps determine how it may address a firm’s individual operational risk management needs.
For example, some GRC platforms are built around one specific aspect of risk management, such as risk assessment. Others drill down one level further and are structured around one particular regulator. Some are known for improving collaboration across business functions — aligning IT, operations, legal, and others by providing access to the same data within one framework — while others specialize in the ability to integrate with existing systems and legacy data.
FX firms will have to evaluate the factors of each to determine which is right for their specific needs, but GRC platforms can bring Risk and Compliance teams out of the quagmire of Excel spreadsheets and into the modern era.
Knowledge Automation
Knowledge automation represents the next frontier of RegTech — as well as one of the most powerful manifestations of how technology can help regulatory compliance.
Knowledge automation solutions are positioned upstream of both workflow management and point solutions, situated right at the very beginning of the compliance process. They help solve one of the most complex and intractable challenges of compliance: regulatory change management.
How are FX traders supposed to keep up to date on the constant flow of new regulatory updates being released? When towering new regulations like GDPR are released onto the marketplace, how can FX firms assess which aspects relate to their business in a quick and accurate manner? In short, how can FX traders have confidence that they’re trading compliantly?
At large banks and enterprise firms, these questions are answered by employing a small army of compliance analysts, consultants and lawyers to collect and sift through the dense legalese of regulatory updates. But smaller firms, who usually can’t afford such a hit to their bottom line, are instead left with a few exhausted Risk and Compliance officers, pouring over documents day-in and day-out while traders put trades in with fingers crossed.
Change management solutions are now finally able to leverage technology to help solve these challenges.
Some of these solutions act as a news feed, aggregating all relevant regulatory updates, proposed rule changes, enforcement actions, and speeches in a single place. They automate the laborious and time consuming horizon scanning aspect of change management.
Recent advances in AI technology can take us beyond this, though. At Ascent, we’ve created RegulationAI™ — a true innovation in regulatory technology — which leverages neural networks to automate both the organizing and the sifting processes of change management.
Neural networks are deep learning systems that are taught how to complete a task by being fed large data sets. Our knowledge automation solution treats the vast trove of existing regulatory documentation as a giant data set, runs that data through our trained RegulationAI™, which is then able to automatically determine which obligations apply specifically to a business — automating the transformation from data to knowledge.
Knowledge automation represents the next frontier of RegTech — as well as one of the most powerful manifestations of how technology can help regulatory compliance.
READ ARTICLE: The Rise of Data Privacy Regulation and How RegTech Can Help
Meeting the unique needs of FX
FX firms have the opportunity to get ahead of their competition by embracing regulatory compliance.
There are two aspects of the FX marketplace that make RegTech of special importance to it.
One is the fact that, by its very nature, FX operates within a global marketplace.
This means that FX traders can be subject to even more rules and regulations than, for example, an RIA focused only on domestic operations. Through AI and machine learning, RegTech has the ability to simplify the impact of multi-jurisdictional compliance.
The other is that FX operates within a decentralized marketplace.
Outside of the country-based regulators that oversee FX — like FCA and CFTC — there are two organizations that are globally-focused on “governing” or “guiding” organizations within the FX trading marketplace: FX Global Code and BIS Markets Committee. Both organizations provide guiding principles instead of rules due to the decentralized nature of the FX marketplace. The lack of formality in this regulatory framework has led to a lack of adoption and enforceability.
This represents a competitive advantage for FX firms. One need only look passingly at the path of regulatory compliance to see that, in all likelihood, the decentralized marketplace of FX will only be burdened by more and more regulations in the near future. FX firms have the opportunity to get ahead of this — and ahead of their competition — by embracing regulatory compliance.
READ ARTICLE: “But Does RegTech Actually Work?” 3 Ways Financial Firms and RegTechs Can Bridge the Trust Gap
Stop drowning in regulation.
The superhuman rate of regulatory change and the ever-increasing penalties for non-compliance don’t have to be a stumbling block for your business. RegTech offers a way to feel empowered rather than restricted by the rule of law.
LEARN MORE: Click here to learn about Ascent Solutions
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