The Emergence Of Behavioral Analytics In Financial Markets Compliance

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The Emergence ofBehavioral Analyticsin Financial MarketsCompliance2017 NICE ActimizeFMC Survey1

Table of ContentsIntroduction . 4Behavioral Analytics Survey Methodology . 5Key Findings . 7Behavioral Analytics Enriches Surveillance . 8Reduced Regulatory Risk . 9Reduced Operational Risk . 10Behavioral Analytics Will Focus on Individual Threats . 11Data Types Used For Behavioral Analysis Will Increase Over Time . 12Firms Know What They Want to Measure . 13Firms Are Eager to Adopt . 14Selecting the Right Solution . @nice actimize

IntroductionConduct-related threats such as collusion, unauthorized trading,benchmark manipulation and rogue trading put firms at risk. They’redifficult to prevent because they don’t follow a predictable pattern that canbe modeled. Nevertheless, firms must uncover conduct-related threats inorder to meet their regulatory obligation to prevent market abuse, minimizeconduct risk and create a culture of compliance. From a businessstandpoint, these threats—along with weak trade controls and failingto detect suspicious activity—can trigger eight-figure financial losses,substantial legal fees and irreversible reputational damage to the firm.Understandably, firms need to address both sides of the compliancecoin—known forms of market abuse such as layering and spoofing aswell as hidden conduct-related threats. To achieve this, many firms areadopting a risk-based approach to surveillance by analyzing patterns overtime, enabling them to catch known and unknown threats as they develop.The emergence of “Big Data” and advanced analytics, such as behavioralanalytics, is bringing risk-based surveillance within reach. Behavioralanalytics enables firms to identify risky entities—including traders,investment advisors and accounts—by analyzing a wide range of data andmeasuring deviations from normal @nice actimize

Behavioral AnalyticsSurvey MethodologyNICE Actimize partnered with Infosurv in 2017 to deploy anindustry survey on the emergence of behavioral analyticsin financial markets compliance. The survey definedbehavioral analytics as the measurement of anomalies froman individual’s “normal” behavior or their peer group acrossmultiple risk factors.Theobjectives ofthe surveywere:1Quantify the adoption of behavioral analytics in surveillanceprograms by financial services firms2Identify the challenges and use cases firms believe behavioralanalytics can address3Understand the business value firms believe behavioral analyticscan produce for them4Identify the data, entities and risk factors firms intend to analyze intheir behavioral analytics @nice actimize

Sixty individuals from financial institutions worldwide including broker/dealers and investmentbanks participated in the anonymous survey.Respondentsby Region ofResponsibility14%Respondentsby CROWGlobalRespondentsby Asset her24%11%15%10%9%14%EquitiesFixed IncomeFXFuturesOptionsSwapsOther*Respondents were allowed to choose multiple @nice actimize

Key FindingsThe adoption of behavioral analytics among financial services firm isat an inflection point.42%79%84%expect to implement behavioralanalytics in the next 12 months.believe behavioral analytics willhave a positive impact on theircompliance program.state behavioral analytics as one oftheir top 5 priorities for 2017-2018.Behavioral analytics will mitigate multiple forms of risk.82%77%82%agree or strongly agree thatbehavioral analytics can uncoverhidden threats that model-basedanalytics aren’t designed to detect.believe uncovering hidden threatswill enable them to reduceregulatory risk.believe detecting hidden threatswill enable them to reduce theiroperational risk and financiallosses.Firms will seek an integrated surveillance solution – combining model-basedanalytics and behavioral analytics – in order to improve effectiveness, whilereducing the total cost of compliance.91%73%believe that using behavioralanalytics accelerates theinvestigation process when usedin conjunction with model-basedanalytics.believe that using behavioraland traditional, model-based,analytics together helps them moreaccurately assess @nice actimize Only15%plan to build a home-grownbehavioral analytics

Behavioral AnalyticsEnriches SurveillanceThere’s a strong consensus among respondentsthat behavioral analytics uncovers hidden threatstraditional analytics can’t detect. With firms adoptinga risk-based approach to surveillance, this aspectof behavioral analytics can significantly transformexisting surveillance programs.Respondents view behavioral and traditionalanalytics as complementary technologies, enablingthem to more effectively address threats.91%69%8agree that viewing alerts generated bytraditional analytics and behavioral datatogether will accelerate the investigationprocess and 86% say that using behavioralanalytics in conjunction with traditional alertswill enable them to more accurately assessalerts for known forms of market abuse andinsider trading.82%say that BehavioralAnalytics willenable them todetect hiddenthreats that can’tbe detectedby traditionalanalytics such asconduct risk orconflicts of interestbelieve it is very important or critical thatbehavioral and traditional analytics areintegrated in one platform, but only 23%currently have a platform that correlatesbehavioral data with @nice actimize

ReducedRegulatory RiskRegulators require firms to prevent market abuse, minimize conduct riskand establish a culture of compliance. To meet this mandate firms mustuncover conduct-related threats such as collusion, unauthorized tradingand benchmark manipulation. These threats often remain hiddenbecause they don’t follow a predictable pattern that can be modeled.Firms must also catch all threats early to minimize their impact. The vastmajority of respondents believe that behavioral analytics helps firmsdetect hidden threats.Regulators and standard boards are generally not prescriptive about howfirms mitigate risk, particularly from conduct-related threats. However,direction from several organizations seems to favor an approach based onanalyzing anomalies from normal behavior: 77%of respondentsagree or stronglyagree thatdetecting hiddenthreats reducestheir regulatoryriskFEMRsuggests mitigating risk by monitoring an individual’s conduct andidentifying vulnerabilities FINRAadvises mining trade data for deviations from normal trading patterns FICCMarkets Standard Board endorses systems to prevent transactionbased conduct risks MASrecommends advanced analytics to detect complex patterns formarket @nice actimize

ReducedOperational RiskBasel II defines operational risk as the risk of losses from inadequateinternal processes, people and systems. Losses are often staggeringlegal fees, irreversible reputational damage and eight-figure financiallosses. Conduct violating company processes and policies—missedtraining, trading outside of normal hours, breaching risk limits—createsoperational risks such as weak trade controls, inability to detectsuspicious behavior and improper market conduct. Mitigating theserisks requires the analysis of behavior patterns to uncover the hiddenviolations driving them. The vast majority of respondents believe thatbehavioral analytics helps firms detect such hidden threats,Everyone at the firm – front office, compliance and the risk group—isvulnerable to operational risk and tasked with preventing it. That’s likelywhy respondents agree or strongly agree that behavioral analytics willhave a positive impact on the risk team (81%) compliance (79%) andthe front office (74%) @nice actimize 82%of respondentsagree or stronglyagree thatdetecting hiddenthreats reducestheir operationalrisk and

Behavioral Analytics WillFocus on Individual ThreatsBehavioral analytics can be used to identify anomalous behavior anduncover hidden threats posed by individuals as well as entities – peergroups, legal entities, business units and so on. According to thesurvey, firms will use behavioral analytics to focus mainly on individuals –especially traders and brokers – rather than the analysis of groups. This isunderstandable due to the fact that behavioral analytics can detect threatsas they are developing, and bad behaviors start at the individual level.11%What will yourbehavioral analysisfocus @nice actimize 24%AdvisorsLegal

Data Types Used ForBehavioral Analysis WillIncrease Over TimeThe survey indicated clear differences in the types of data used forbehavioral analytics in the short term versus the long term. As evidencedby the chart, firms will predominately use trade and communications dataas well as market news in their behavioral analytics over the short term.This aligns closely with the recent trend toward the use of metadata fromcommunications rather than content of the communications to mostaccurately identify non-compliant behavior. In the longer term, HumanResources data will be significant.Although there is a planned increase in data types used to supportbehavioral analysis, the majority – nearly 65% – agree that behavioralanalytics can generate new, valuable insights from trade data (i.e., orders,executions) alone. Thus, respondents recognize the immediate valuethat can be derived from behavioral analytics as well as the longer termpossibility and benefit of integrating additional data sources and metadata.Nearly65%agree thatbehavioralanalytics cangenerate new,valuable insightsfrom trade data(i.e., orders,executions)aloneWhat types of data will be used for your behavioral analysis?OtherPositionValue at Risk (VaR)P<rades and OrdersMarket NewsHuman Resources*Communications0%10%Short Term20%30%40%50%60%70%Long Term* Human Resources data was described as T&E, gifts, conformance with vacation policies, building access and so @nice actimize

Firms Know What TheyWant to MeasureThe survey showed that respondents were consistent with regard to the type of behavioral factors they want to beable to measure. Out of 20 possible factors, there were a total of 7 that at least 50% of respondents reported theywould like to measure. All of these factors can be categorized as communications data, trade data or HR data.Which behavioral factors would you like to be able to measure?Trading outside of normal hoursTrading limit breachesTrading in products outside trader’s remitParticipants in emailNumber of unknown attachmentsNumber of market surveillance alerts closed as an issueNumber of market surveillance alerts over timeNumber of daily cancellationsDuration of callDaily order to trade volume ratio from profileDaily order to trade count ratio from profileDaily number of stop limit ordersDaily changes in positionsDaily changes in P&LCounterparty concentration by volumeChange in vacation/sick daysChange in communication languagesChange in communication types0%10%Short @nice actimize 20%30%40%50%60%Long

Firms Are Eagerto AdoptThis eagerness seems to reflect their strong belief that behavioral canreduce operational and regulatory risk while accelerating investigations. Itcan also be explained by the perceived positive impact to the front office,compliance and risk organizations.Finally, in terms of adoption of behavioral analytics, it’s clear that no onewants to go it alone. Nearly 70% of respondents indicated that they wantto purchase their solution from a vendor or have a mix of homegrown—and vendor-supplied behavioral analytics. Just 15% of respondents wantto build the solution themselves.Only 16.7%of respondents have implementedbehavioral analytics in their surveillanceprogram, but 42% plan to deploy in thenext 12 @nice actimize

Selecting the RightSolutionAs indicated by the report, firms are eager to adopt behavioral analyticsto complement their traditional analytics. This will help them address bothsides of the compliance coin—known forms of market abuse such aslayering and spoofing as well as hidden conduct-related threats.Our experts at NICE Actimize have outlinedthe following components to look for whenselecting and implementing a behavioralanalytics solution: Correlates behavioral and traditional alerts in one case managerIncludes OOTB risk factors and ability to create custom onesEasily incorporates trade, communications, HR data and moreVendor has proven expertise in financial markets complianceNICE Actimize recently introduced Holistic Behavioral Analytics, whichis designed to help financial institutions uncover conduct-related threatsthat traditional analytics weren’t designed to detect.Visit our website or contact us at for a @nice actimize

Why NICE ActimizeSafeguarding the financial industry by preventing, detectingand investigating financial crimesFocusFocus exclusively on enabling predictive, preventative compliance for regulatory andreputational risk.KnowledgeComplete and packaged suite of offerings across all asset classes, instruments,markets, communications and global jurisdictions.ExperienceExperience with widespread deployments across financial institutions globally.PartnershipSingle view of risk allows you to safeguard your firm and clients and grow yourbusinessAbout NICE ActimizeNICE Actimize is the largest and broadest provider of financial crime, risk andcompliance solutions for regional and global financial institutions, as well asgovernment regulators. Consistently ranked as number one in the space,NICE Actimize experts apply innovative technology to protect institutionsand safeguard consumer and investor assets by identifying financial crime,preventing fraud and providing regulatory compliance. The company providesreal-time, cross-channel fraud prevention, anti-money laundering detection,and trading surveillance solutions that address such concerns as paymentfraud, cybercrime, sanctions monitoring, market abuse, customer duediligence and insider trading. Copyright 2017 Actimize Inc. All rights reserved.16

The emergence of "Big Data" and advanced analytics, such as behavioral analytics, is bringing risk-based surveillance within reach. Behavioral analytics enables firms to identify risky entities—including traders, investment advisors and accounts—by analyzing a wide range of data and measuring deviations from normal behavior. Introduction

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