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Currency traders - monitored by "24-hour Big Brother-style surveillance" in the wake of a global scandal which resulted in $14 billion in fines - are so petrified of AI-powered compliance systems that they've stopped swearing over the phone, reports Bloomberg

Traders today are subject to 24-hour Big Brother-style surveillance that goes beyond the scrutiny of equity and bond desks. It uses machine learning and artificial intelligence to lurk in chatrooms, listen in on phone conversations and flag anything that might carry the whiff of criminal or abusive practices. The clampdown was described by more than a dozen industry participants, including those flagged for rough language, who requested anonymity because they weren’t authorized to speak publicly. -Bloomberg

"It's been a nightmare" said Swiss asset manager Thomas Wind. "No one can do anything." 

Wind was flagged by the compliance department from his friend's bank after he sent a publicly available news story. After he argued that he should be able to send a public document, he was told that the bank would continue to monitor the conversation. 

Former HSBC Holdings Plc currency boss Mark Johnson was the first to be convicted, and three ex-traders from other banks are scheduled to go on trial Oct. 9 in New York. -Bloomberg

Trading records analyzed

The silicon sleuths are also poring over trading records, scanning for unusual transaction sizes, abnormal prices or suspicious timing, according to Steve LoGalbo, a director at compliance software vendor NICE Actimize. 

The advanced snooping was implemented following a price-rigging scandal that led to massive fines and sweeping reforms by regulators and foreign-exchange executives. "The three ex-traders -- Richard Usher, formerly of JPMorgan Chase & Co.; Chris Ashton, previously at Barclays Plc; and Rohan Ramchandani who was at Citigroup Inc. -- are charged with conspiring to fix the market while participating in an electronic chat room known as "the Cartel,"" writes Bloomberg

Between 2014 and 2017, broker-dealer divisions at several banks spent around $2.3 billion on compliance, with surveillance accounting for roughly half of that according to Danielle Tierney, a senior analyst at Aite Group. 

Extreme caution

Dishonest traders have "opened the eyes of buy-side participants to be very cautious and wary," when interfacing with banks, according to Vanguard's head of FX trading, Andy Maack. Two years ago Maack was critical of a controversial practice known as "last look," which allowed traders to back out of losing trades at the last second. 

"The pendulum always swings, and swings hard, the other way after periods of scandals and fines," said Maack. 

Some financial firms are taking fingerprints to prevent financial crimes, and several banks have moved front-office staff into risk departments to police their ex-colleagues, according to the currency traders who asked not to be identified. Some bankers say they avoid meeting socially to prevent the appearance of collusion. Even jokes are discouraged. -Bloomberg

BNP Paribas SA co-head of FX local markets and commodity derivatives, Adrian Boehler, says that bolstering standards is a "commercial opportunity." BNP agreed to pay $686 million in fines over the last 24 months for misconduct, and now segregates order information while automating various trades to avoid conflicts of interest. 

According to a February statement by Boehler, he is "personally liable for anything untowards that happens on my watch," and "Consequently, I sleep much better at night knowing that I have embedded in the first line of defense, i.e., embedded in the business, a surveillance mechanism which gives me feedback from the front line."

At the Federal Reserve Bank of New York, audit and compliance teams are “pretty tough,” said Simon Potter, head of its markets group. The bank’s operations are reviewed by independent risk teams, separate from the trading desk, forming a second line of defense against misconduct, Potter said. Companies that sit on the foreign exchange committee overseen by the New York Fed also have a similar setup, Potter said at a July conference. -Bloomberg

The Fed's Potter is currently spearheading an effort to overhaul standards and rebuild trust in the FX trading market, which is mostly over-the-counter, global, and doesn't fit very well under the authority of any one single regulator. 

Concerns remain

Despite the billions spent on AI-powered surveillance and other compliance measures, concerns still remain over the controversial practices of last look and front-running. 

The zero-tolerance approach among many industry executives means that FX staff have to accept heightened scrutiny if they want to stay in the business. Some market participants complain that the tactics used are inefficient and ineffective. -Bloomberg

Former FX analyst for the New York Fed, Maya Rodriguez, believes that "Only when traders see that they can go to jail will they improve their behavior."