Exchange Rate Rigging Allowed to Thrive in 'Dark Data' Blindspots

The ability of groups of rogue traders to manipulate the foreign exchange market indicates how little banks actually know about themselves.

While much focus has been placed on the moral failings of the traders involved, a ‘smart data’ specialist has told us what is more worrying is the inability of the banks’ own internal compliance data management systems to identify foreign exchange manipulation.

It would seem that banks are still too ill-equipped to sift through and monitor their vast amounts of unstructured data within which manipulation and problems naturally reside.

"The evidence of corruption, unethical conduct and inappropriate behaviour among traders in this latest forex-rigging scandal will have been there since the beginning. The problem is that the banks' compliance departments, reliant on legacy technologies, have not been able to see it because it lies within Dark Data,” says Freddie McMahon, Director of Strategy & Innovation at Anomaly42.

Dark Data is simply that data which isn’t known about by the relevant compliance and oversight structures within the bank.

The Financial Conduct Authority, who issued the fines, has cited “ineffective controls” as being a key reason behind the forex scandal and have said they, “will require senior management at firms to take responsibility for delivering the necessary changes.”

According to McMahon banks will need to work together on data oversight if they are to deliver on this task:

“It's in unknown data, not the structured data of databases, KPIs and dashboards, where suspicious activities generally reside.

"One of the main causes of Dark Data is the fact that data is so heavily siloed within banks and across banks.

"This plays a key role in preventing suspicious activities coming to the fore. No one bank is connecting the dots. Instead, each sits within its own data silo.

"While corrupt traders may be communicating effortlessly, the banks are not and if we're to prevent further banking scandals, this has to change."

According to a PwC assessment of the exchange rate scandal, the reviews that need to be put in place will be wide ranging and include pricing, disclosure of information to clients, practices relating to sharing of information, communication controls and surveillance.

Improvement of controls over the WM Reuters and European Central Bank fix will also be required.

Simon Hunt, Financial Services Risk and Regulation partner and front office control specialist at PwC says:

"While there are many elements to building effective defences to prevent and detect misconduct or inappropriate behaviour, robust supervision and oversight of front office staff remains the essential cornerstone of the first line of defence. The industry has invested heavily in more effective supervision over the past two years, particularly to respond to previous unauthorised trading incidents. However, ensuring the broader conduct agenda is effectively embedded into supervisory mechanisms remains a work in progress."

Unanswered Questions Remain

Following news that Royal Bank of Scotland, HSBC, Citibank, JP Morgan and UBS were fined a combined 2 BN GBP, a former foreign exchange trader tells us many questions remain unanswered.

Mark Taylor at Warwick Business School, who in addition to being a former foreign exchange trader was also a senior economist at the Bank of England, says:

"These are very large fines but they are relatively small beer for banks that regularly report billions of dollars in annual profit.

"The interesting thing is that there are no individuals named as yet, and no individual  prosecutions. This is still a possibility and it will be interesting to see how that pans out. At the moment, it's really only the shareholders - which in the case of RBS means British taxpayers - who suffer from these fines.

"This is another blow for the city of London. The world financial system centres on London and it's vital for the UK economy that London continues in that role.

"The UK financial regulators - including the Bank of England and the FCA - are working hard to restore confidence in the City. An important element of this will be the recommendations of the Fair and Effective Financial Markets Review, which the Bank, the FCA and the UK Treasury will jointly publish next year."