When the UK's Financial Conduct Authority banned ex-UBS trader Arif Hussein from financial services for sending inappropriate messages to colleagues about the manipulation of rate submissions, the thoughts of exchange-facing firms, including private banks, turned understandably to ways in which to avoid such trouble themselves.

Banks everywhere rushed to beef up their procedures. The regulators concentrated on replacing flawed benchmarks, while compliance heads worried about how much more monitoring they were going to be required to do. Their systems and controls were of limited use, their budgets were tight and their staff were over-worked, so this was a major worry. Furthermore, the rules were not particularly clear or detailed: how much surveillance was enough?  Which tools were best? What lexicons should compliance officers use? Whom should they survey and how often should they do it?

Five years on from the original offences, have firms identified and started to use the appropriate systems and controls? Do the top brass at those firms realise that manipulation and the abuse of markets by their trading staff may result in regulators taking action against them?

Communications multiplying out of control

Perversely, perhaps one could argue that the European Union's second Markets in Financial Instruments Directive (MiFID II) and the Market Abuse Regulation (MAR) provide helpful clarity in this area. Among their many requirements, those regarding the recording of all trade-related interactions in respect of all asset classes may be a boon. Even the simplest foreign exchange (forex/FX) transaction may involve several conversations in the lead-up to, and execution of, the trade. The availability of more mobile, sophisticated communication technology has only served to enlarge the amount of related data that every firm ought to be tracking through the entire lifecycle of a trade, from execution to settlement.

This requires the firm to spy on all sources of communications and, most crucially, detect of the context behind every conversation. The potential for fraud does not just exist in one isolated Bloomberg chat, but also in the commands and operations that initiate those conversations. Today, incriminating clues and evidence are scattered throughout a myriad of chats between traders and on numerous channels. From classic slang such as 'cables' and 'Bill and Bens' to emerging terms such as 'hodl' (hold on for dear life) and 'satoshi,' traders use a huge amount of jargon. This has made it very hard for compliance teams to tell the difference between the innocent and the suspicious.

These conversations are not only taking place on messenger channels. People intent on manipulating rates and/or markets know full-well that systems for tracking voice communications are less effective than all the others. If they want to fool the listeners, they can switch languages or use different intonations to obscure their intentions. Although firms are now monitoring more voice conversations than before, specific analysis is rare. Most banks still only carry out random voice recorded samples to look out for bad behaviour. Some only sample 15 minutes of audio per day.

In view of the fact that traders are very sophisticated in their use of language to mask suspect conversations on many channels that have nothing to do with Bloomberg chat, how can a bank that is trying to make its way in the post-LIBOR world leave no stone unturned? The answer may lie in working out a way that does not tackle communications in isolation, but puts every interaction into context and (most importantly) considers all other information that surrounds a trade. Proactive trade reconstruction software can now automate the identification and analysis of every communication referring to every trade in a way that sidesteps information silos.

This analysis, for example, could include important intelligence such as the means by which everyone agreed on a certain price and the way in which the firm in question measured the liquidity profile of this-or-that trade. Other intricate details, including the length of time during which (and the trading channels in which) an employee has been trading, ought to be included also.

Windows on men's souls

This is not enough. Banks also ought to be able to look at their traders' activities. Only then will banks be able to ensure the incident or intent of a conversation is supported by a specific behavioural change. As a case in point, it may well be that a trader is consistently using an untoward phrase over Messenger, the Internet contact tool, when he talks to a colleague. Without the context around these interactions, banks will not know the significance of the communication.

While much has been done to increase the surveillance of chat since the LIBOR scandal, there is no getting away from the fact that conversations have become significantly more convoluted since Hussein’s conviction. There will be more investigations, more penalties and more scandals. And now the FCA and other regulators have tools to take action against not only perpetrators but also management – at all levels. Has your firm done enough? Do you cover all communication channels? Is the front office involved in surveillance? Can you demonstrate the actions taken when suspicions are raised? There is zero tolerance from regulators, and, frankly, zero excuse for not having the appropriate tools.

If your firm has not invested in new software since the LIBOR scandal hit the headlines, you have not done enough. It will cost money but you absolutely have to offset the risk - otherwise, you expose yourself and your firm to detrimental headlines and, like Arif Hussein, being banned from the industry. For life.