By Brad Rosen, J.D.
An all-star panel of regulatory professionals convened in downtown Chicago to consider the burgeoning field of regulation and technology at a meeting of the FIA Market Technology Division. The program, titled The Current State of RegTech, featured a cross-section of leaders from various ends of the industry, including representatives from trading companies, clearing firms, exchanges, and vendor/solution providers.
Matthew Scharpf, vice president of Eurex Americas, opened the presentation by comparing the state of the futures and derivatives industry to the city of Chicago in the aftermath of its great fire in 1871. He observed that tragedy, when combined with creativity, can clear the path for great opportunity. In the case of the futures industry, the tragedy was the financial meltdown of 2008, which in turn led to the Dodd-Frank market reforms and a rising tide of regulation. The intervening years have also seen the emergence of new and disruptive technologies. These two forces have combined to form the discipline of "regtech." The stated goal of regtech is to utilize technology to help businesses comply with regulations both efficiently and inexpensively.
Regtech is an act in progress, and Sharpf turned to his fellow panelists for their insights regarding its current applications and limitations, as well as its future possibilities. Matt Lisle, a director and chief compliance officer with ABN AMRO Clearing Chicago, shared his real world perspective that over the past 30 years the industry has gone from analog to digital. However, that has not been a panacea. Lisle observed, “most in the industry have the challenge of multiple systems, no standard solutions, and are barraged by constant updates.” “Technology doesn’t always work as intended, and unintended errors can lead to big fines,” he added.
On a more positive note, Lisle sees technology as playing an important role promoting culture of compliance that focuses on behavior. He sees increased technological innovation as reengineering the workplace of the future.
Kurt Windeler, a senior director of market regulation with the Intercontinental Exchange (ICE), is deeply involved with the exchange’s regulatory function—as a cop on the beat. He sees technological innovation as playing a key role in assuring market integrity. Windeler also sees using technological tools to identify risks that impact market integrity as a core challenge. In his view, market integrity extends to various activities such as clearing, trading, interaction among market participants, and marketing
Windeler also observed that there are many issues surrounding data quality and validity. “ICE integrates multiple data sources and is increasingly becoming a data company in its own right,” he observed.
Big data and how best to use it will remain a major challenge for the industry, Corbin Kidd, a chief technology officer for DV Trading, a Chicago based proprietary trading firm noted. “We are drowning in data, what we are looking for is wisdom,” he said.
Brian Clark, the chief executive officer with Ascent Technologies, a solution provider, sees the challenge of adapting to and keeping up with the pace of change as well as the breadth and depth of information available, as just a couple of the things that are keeping folks up at night. Clark noted that the Dodd-Frank reforms resulted in over 1300 new compliance obligations across regulators. Clark and Ascent have taken the approach of providing intelligence as a service. Clark sees computers as serving as management’s right hand and will be able to address many routine problems. However, people will still have to deal with the toughest problems.
James Austin, the chief executive officer with Vertix Analytics, another service provider, shared his view that the CFTC is highly suspicious of automatic and algorithmic trading. From an enforcement perspective Vertex sees technological tools as being the extension of those persons involved in a particular activity. Austin notes that the Commission itself as trying to accelerate its embrace of technology but faces many obstacles including not receiving the funds to pursue these ends.
Most members of the panel were also skeptical of Lab CFTC, the recently announced technology initiative. Many thought it was a good idea but did not think much will come of it. Additionally, panel members noted that it appears that the Commission’s recent request for a $31.5 million budget increase for FY 2018 will likely be rejected. The lion’s share of that increase was to be devoted to technology-related initiatives according to Acting Chairman J. Christopher Giancarlo. Most of the panel thought the government’s lack of support in this regard was unfortunate and failed to recognize the importance of technological innovation in the world of regulation.