Trader Mandates: New standards for an effective control
As capital markets move towards greater accountability, regulators in the UK are taking a second look at how businesses deploy trader mandates.
Trader mandates are one of the primary tools for defining and monitoring trader activity, yet regulators have found that immature governance and data quality issues have caused a gap of understanding of traders’ activity. In turn, many firms are at risk of exposure to conduct risk.
Regulators now expect businesses to improve the way trader mandates are implemented. Three shortcomings in particular have been singled out: insufficient granularity of mandates, poor processes to detect and resolve breaches and the lack of a strong governance for approvals and changes to mandates. The challenge for businesses now is addressing these problems.
Defining good practice
Following a thematic review, regulators have made a number of observations and set requirements to serve as standards for the industry. Their guidelines should serve as the foundations of an effective trader mandate framework:
- Sufficient granularity to clarify activities of desks and traders;
- Independent review and oversight of mandates including additions and changes;
- Mandates should be set and monitored at individual level;
- Automated monitoring of trades against mandates at granular level; and
- Timely escalation and resolution of breaches.
Firms are facing significant hurdles on the road to a better trader mandate framework, with several key areas to focus on in order to come out on top. One of the main areas of concern stems from identifying risk takers and maintaining accurate records for new joiners, leavers and transfers, which can be achieved through systematic reconciliation between access to trading systems and HR databases. Another is allocating mandates at a level that reflects individual capabilities and experience. Firms must also consider the degree of granularity they take in monitoring and constraining these individuals.
Other issues include: whether one’s business is able to prevent people from trading outside their mandate; how they improve data for trader identification; and how to measure, and report on, the effectiveness of the control framework. While there are dozens more issues to consider, many will be addressed with a renewed governance structure. Firms should not forget to set minimum requirements for designing, implementing and monitoring these mandates.
These questions will be particularly challenging for UK-based firms in which the Senior Manager Certification Regime (SMCR) places personal accountability on individuals. Banks need to demonstrate they have solid procedures in place to comply with the requirements.
As firms reassess their strategy, some may be tempted to increase the range of attributes in their trader mandates, particularly around desk strategy, permitted products, and off-premises trading restrictions. Supervisory responsibilities and risk limits may end up under consideration too. The danger of increasing the reach of a trader mandate is that it could impact a firm’s wider conduct risk initiative.
The key takeaway, then, is to remember that a trader mandate is just one part of a wider conduct risk framework and should not be reviewed in isolation. Most businesses already operate risk controls associated to trader mandates separately, such as front office supervision, Volcker rules, and market risk limits. All of these contribute to defining and monitoring trader activity.
The main challenge in meeting regulator requirements is in demonstrating the robustness of the overall control environment. As practices evolve and firms refine their control environments, we will likely see a shift in standards applied by market participants and re-appraisal of what is appropriate in these areas.
For more information, please contact Jerome Bokobza, Director in Banking Risk Management for KPMG in the UK.
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