Manipulation is never a hot topic for compliance specialists as it is the Great Ocean on which they all sail. No single fraud is more important for detection and prevention than open market price manipulation. Market integrity is the bedrock upon which transactional capitalism rests. It is a C-Suite topic that inspires fear, dismay and often raging anger. Everyone wants markets that are free from corruption. Every firm, every bank and every regulated entity states its desire to be compliant with the laws, rules and regulations of their businesses. Businesses seek to be honest, and broadcast their value as trustworthy partners or counter parties. Integrity matters, at least on paper. It costs money to examine internal behaviors in markets. CEOs do not set out to reward law-breakers, though they often do, nor do they set out to permit cultures of deception and of outlaw practices. Immense wealth is spent in providing training of compliance practices and ostensibly of identifying illegal conduct. Generally compliance is viewed as a cost of business rather than a savings practice. Last but not in the least, not paying fines and not suffering reputational risk are worth real money.
What is benchmark manipulation? Quite simply when it comes to benchmarks, it is the injection of trades to influence the price settlement of a speculative position. The foundation of indices are benchmarks. Benchmark prices are deemed to be determined by transactions dependent only upon the fundamentals of supply and demand of the underlying traded commodity or security. Speculative cash settled financial product interests are bets meant to rest upon the outcome of the forces of supply and demand. Speculative interests are not meant to contribute to benchmark price formation. A crude analogy is the sports bet on the winner of a game. If the game is played fairly then the bet will be paid out simply based on which team won. In market interferences participants sometimes apply a legitimating rationale. A participant errs in believing, because they have a financial interest in the outcome of the speculative trade or position, that they can influence the outcome by providing liquidity to correct or change the price of the benchmark. This is no different than saying that because a financial interest exists in a sports bet, a betting party is entitled to inflict an injury on an opposing player or players to insure the outcome of the game.
Benchmark manipulation is the most common and historically least likely market interference to be detected by a regulator. Benchmark manipulation has commanded staggering penalties (hundreds of millions to billions of dollars), though those penalties seem paltry to me as the financial impacts to price formation and therefore costs to end-user consumers are far greater to society than what is clawed back. How do entities view the costs of their uncovered illegal conduct? I’ll answer the question with a question: which board has fired a CEO or other officers for a benchmark manipulation?
What are the nuts and bolts required for detecting benchmark manipulation? Regulators need access to the full portfolio of all open trades of a participant and their contributing trades to benchmarks. In the commodities space, futures and options on futures, this data for review by the regulator is excellent. But it is only one leg of a three-legged stool called commodity markets. A second leg is trading and positions in swaps and swaptions, and this information’s availability to the regulator is good, but there can be holes. The third leg of the stool consists of the cash market(s) and forward physical positions and transactions, and the availability of this data to a regulator is a desert. There isn’t any centralized collection of physical trades. To understand the trading of any entity and its incentives to inject interference into real supply and demand, the positions and trading information must be complete and linkages fully appreciated. This three-legged stool of information is only available to the commodities regulator through a regulatory channel, either a subpoena or a Special Call. Rebuilding market events, participants’ conduct, and detecting benchmark abuse by any agency requires all three legs of the stool.
A trading company or financial institution has the best data to uncover the entity’s own illegal conduct and benchmark manipulation. An entity’s own data is complete, including those with global trading books or portfolios. Banks and other participants can review their own data and see how their own trades impact price formation, how those position trades and contribution to index trades became part of their portfolio and what benefitting positions from the interference existed.
This is not hard work. A simple spreadsheet can be created to demonstrate the incentive. Real cultural compliance with the anti-manipulation regulations only requires a willingness to view trading activities with a skeptical mind and the discipline to internally enforce regulations.
Asif Alam is the Chief Executive Officer at Compliance.ai. A leader in shaping disruptive technology, his experience includes building products using AI and natural language processing for GRC, payments, lending, risk, trading, and new solutions, from Fortune 500 companies to startups.
In his most recent role, he served as the Chief Strategy Officer of ThoughtTrace, unlocking new revenue streams and markets, and reignite portfolio growth. ThoughTrace was then acquired by Thomson Reuters in 2021.
He brings more than 20 years of management and business experience; increasing profitability, unlocking new revenue streams and markets, and reignite portfolio growth for companies like Thomson Reuters, Crux Informatics, and Finastra. Asif is a forward-thinking expert driving engagement via client forums, public presentations, and white papers.
Cesar Lee is a Principal at WRV, a venture capital fund focused on early-stage investments in hardware, semiconductor, and other technology-related companies. Previously, he was an investment professional at Riverwood Capital, a technology-focused, late-stage venture capital, and private equity fund. He began his career at RBC Capital Markets, where he was part of the Mergers & Acquisitions group for two years and the Equity-linked & Derivatives group for one year. While at RBC, Cesar spent a majority of his time working on M&A advisory transactions for technology companies.
Cesar’s investment experience includes buyouts, later stage, early stage and seed rounds. Cesar has completed transaction in the U.S., Latin America, and Asia, and in technology sectors including data centers, software, semiconductors, consumer electronics, robotics, big data, and internet.
Maria Devassy is a RegTech, Content, and Technology leader with over 20 years of experience helping companies bridge the gap between technology, product, and business. Maria has held leadership positions with MetricStream, KPMG, Oracle Corporation, and other technology companies. She has launched several successful RegTech products, business partnerships, and advised Fortune 100 clients on risk management, audit, advisory, and compliance business across Industries.
Hugh Cadden is a recognized expert in derivative financial and trading markets including futures, options, and swaps. Hugh is currently a senior consultant and expert with OnPoint Analytics, Inc. an economic, finance and statistical consultancy specializing in expert testimony for complex litigation. He has been specializing in the organization, operation, and regulation of financial and trading markets for over 40 years. Hugh’s experience includes both the public and private sectors and he has held senior level positions with the U.S. Commodity Futures Trading Commission including serving as Director of the Division of Trading and Markets and Deputy Director of Enforcement. He has been qualified as an expert on financial and trading market matters before the Commodity Futures Trading Commission, the Securities and Exchange Commission, the U.S. Tax Court, Financial Industry Regulatory Authority, National Futures Association, American Arbitration Association and federal courts.
Drake Ross is a former bank regulator who specialized in compliance with consumer protection regulations while at the OCC, FDIC, and OTS. While at these agencies, he provided extensive training and guidance and developed materials to ensure full comprehension and proper application of rules, laws, policies, and guidance, and served as a Subject Matter Expert in numerous areas. Because of his expertise, he often presented at agency and industry events. He also played a significant role in successful windup of the 2008 IndyMac Bank failure, where because of his extensive knowledge of the FDIC deposit insurance regulations, he was called upon to administer highly-complex insurance determinations.
Carliss Chatman is an Assistant Professor of Law teaching Contracts, Agency and Unincorporated Entities, Corporations, and Transactional Skills. Her work is influenced by over two decades of service on non-profit boards and involvement with community organizations. Through leadership positions, she has developed expertise in corporate governance and non-profit regulation. She has also been instrumental in strategic planning and fundraising efforts. Prior to law teaching, Professor Chatman was a commercial litigation attorney in Houston, Texas. In practice, she focused on trial law, appeals and arbitration in pharmaceutical, health care, mass torts, product liability, as well as oil, gas, and mineral law. In addition to negotiating settlements and obtaining successful verdicts, Professor Chatman has also analyzed and drafted position statements regarding the constitutionality of statutes and the impact of statutory revisions for presentation to the Texas Legislature.
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Mariam is an Operating Principal at Cota Capital. Mariam has experience providing guidance on strategic and operational planning to Venture and Growth stage companies. Prior to Cota Capital, Mariam spent her career in management consulting as a Director at KPMG. She has experience leading global transformation programs and developing innovative service offerings for Fortune 500 companies in the Technology sector. Mariam has an MBA from UCLA’s Anderson school of management with an emphasis in Finance and Entrepreneurship. She has a Bachelors in Science in Finance and a Bachelors in Science in Economics from Santa Clara University.
Chris Callison-Burch is an Associate Professor in Computer and Information Science Department at the University of Pennsylvania. His research interests include natural language understanding and crowdsourcing. He has served the Association for Computational Linguistics as the General Chair for the ACL 2017 conference, as an action editor for the Transactions of the ACL, as an editorial board member for the Computational Linguistics journal, and an officer for NAACL (the North American chapter of the ACL) and for SIGDAT (the special interest group for linguistic data and corpus-based approaches to natural language processing)
Tom Ladt is an experienced executive and investor. Tom has lead and served on the boards of several public and private companies serving highly regulated industries such as technology, healthcare, real estate, and food processing. Tom has also served in key governmental roles and on numerous community boards.
Jeroen Plink is a global executive with a proven track record of developing and growing businesses, teams, and technologies with innovation and passion. Jeroen was CEO of Practical Law US during its acquisition by Thomson Reuters. He now serves on numerous boards and acts as a strategic consultants for start-ups.
Global Legal and Compliance executive with 15+ years of success in the SaaS technology and financial services industries. Partner to the CEO and executive team in corporate transactions, business development, product expansion, and regulatory navigation during periods of intense growth and organizational change. An advocate of effective risk management that starts with sound business practices and putting the customer first.
Richard Dupree has held multiple Risk, Compliance and Operations positions at regional, national, and global financial services firms including Wells Fargo, Silicon Valley Bank, Bank of the West and BNP Paribas. Rick currently advises FinTechs and RegTechs and sits on industry panels, contributes to industry whitepapers, thought leadership efforts, and speaks at industry seminars on Risk and Compliance challenges faced by banks and FinTechs.
Brian advises clients on legal and regulatory compliance in the financial, tech, and procurement sectors. His passion is helping businesses succeed in heavily regulated environments. As counsel and trusted advisor to businesses of all sizes, and as a former regulator, policymaker, and federal official, Brian acutely understands the unintended burdens that even well-intentioned government requirements can put on innovation and business growth, as well as how to create policies that strike the right balance.
Brian served as National Ombudsman in the Obama Administration, leading the federal Office of Regulatory Enforcement Fairness in assisting hundreds of startups, entrepreneurs, and small business owners in every industry and every state.
Dr. Marsha Ershaghi Hames is Managing Director of Strategy & Development at LRN, a leader in advising and educating organizations about ethics and regulatory compliance, as well as corporate culture, governance and leadership. With the focus of inspired behavior versus required behavior, LRN is a leading voice in the industry for companies to build ethical cultures instead of “check-the-box” compliance approaches. She’s advised Department of Justice corporate monitors on successful program transformation under CIAs (Corporate Integrity Agreements. With over 20 years of experience in leading multinational ethics and compliance strategies, Marsha has become a highly sought-after thought leader on leading Corporate Compliance and Ethics practices.
Carla Carriveau is currently the Senior Managing Counsel at Wealthfront, an automatic investment service firm in Redwood City, California. Carla was previously Senior Counsel, Division of Trading and Markets, at the United States Securities and Exchange Commission. As a former regulator with over 15 years of experience in helping small businesses navigate legal and regulatory needs in the financial services sector, Carla advises Compliance.ai on financial services regulation, the regulatory landscape and industry practices.
