In this article we take a look at one enormous problem that exchange-facing private banks encounter when trying to clamp down on market manipulation.

We all have mobiles and use them every single day of our lives – so to expect traders not to use their phones in the modern world is, frankly, absurd. However, in this era of multi-million-dollar fines for using chatrooms to rig currency rates, financial institutions have understandably been struggling to work out just how relaxed their personal device policies should be.

Banks take all sorts of different approaches to this problem on their trading floors. HSBC recently relaxed its restriction on the use of mobile phones on its trading floors to allow employees to respond quickly to emergencies. In a similar vein, BNP Paribas has an arrangement whereby traders go into a booth to have 'private' conversations. So how exactly does a financial institution know where to draw the line and whether or not its traders are likely to cross it?

One the one hand, the more draconian measures a bank enforces on communications, the more creative traders become at trying to get around the rules. As a case in point, if the bank monitors a channel such as WhatsApp, traders will simply move the conversation to WeChat or some other form of communication. On the other, a more laissez-faire approach is bound to lead to instances of market abuse. Banks, however strict or lax their arrangements are, need to come up with policies that protect their reputations and enable their traders to make money without breaking the law.

The British Financial Conduct Authority's rulebook states that “all banks should take reasonable steps to prevent an employee from making irrelevant phone conversations.”

Who is responsible for doing this? With the Senior Managers Regime just around the corner, it is the boardroom, not the trading floor, that is accountable. The C-level at banks knows this and has a vested interest in spotting any gaps in conversations that relate to trades.

The compliance officer may be able decipher 90% of a conversation but not that all-important line where the price has been agreed. Why is this? It could be that the traders have switched from an internal chatroom to another channel that the bank does not monitor in their efforts to “discuss the price.” Banks need to find a way to reconstruct all negotiations of this nature to find gaps in pieces of content that are missing, and spot references to other channels. In this day and age, they must “pick up the conversation over dinner” away from the floor.

Of course, not every conversation away from the confines of the trading floor on another channel leads to the next Libor scandal. However, senior executives at banks can no longer afford to take the risk of not having a safety net. Although there is no cure-all, there are certain measures that they can take. Automatic trade reconstruction is possible because it creates a timeline of the history of a trade.