Surveillance and suptech innovation in central banks

Tony Sio, Nasdaq’s head of marketplace regulatory technology, explains the role market surveillance tools play in central banks’ supervisory technology portfolios.

Central Banking: What have been the biggest drivers of suptech innovation over the past few years?

Tony Sio: Three factors are driving innovation in suptech. First, the banking landscape has become more complex, given the increasing number and variety of traditional and emerging asset classes trading globally. Second, technology is advancing at a rapid pace, driving vendors to evolve their technology offerings to keep up with change. Finally, advancements in technology, combined with an explosion in data volumes, have enabled a shift towards a more real-time data-driven approach to supervision. 

Over the past few years, central banks have begun to leverage suptech to increase the efficiency and effectiveness of market supervision. Specifically, central banks have used Nasdaq to take a more active role in monitoring transactional activity on the products they supervise, such as government debt, foreign exchange and interest rate instruments. Our leading focus is on cross-market and cross-product monitoring, as we have observed rapid growth in derivatives instruments and how interconnected markets have evolved.

 

Central Banking: What are the financial stability implications that come with the increased use of suptech tools? 

Tony Sio: Central banks are always aware of the potential for systemic risk. We have seen how shocks can have a ripple effect across interrelated markets, even leading to the failure of major financial institutions. This can have a devastating effect on the global economy. Hindsight is 20/20, but think back to the onset of the global financial crisis and the repo market in 2007–08. At that time, the diligence with which people looked at collateral they received was not what it needed to be. If central banks had robust suptech tools at the time, they would have been better equipped to monitor trends and risk build-up, and oversee activity across this complex financial ecosystem. Suptech tools with capabilities to integrate vast repositories of data across all areas of the economy enable central banks to conduct thematic reviews to identify and classify risks.

 

Central Banking: How can continuous surveillance and supervision improve central bank policy-making? 

Tony Sio: In the past, central banks would look at metrics and run reports monthly or quarterly, simply because they did not have the capability to monitor markets more frequently because of complexities to normalise and combine many data sources. That has changed with recent technology developments and wider availability of suptech tools. 

Technology allows central banks to monitor emerging trends and detect shifts in the market in close to real time. As such, they can be more proactive and not necessarily reactive. They can become more nimble when it comes to steering policy and changing course. In addition, they are quicker at picking up signs a market participant is engaging in activities that pose risk to the ecosystem, and collecting evidence should there be a need for a full investigation. 

 

Central Banking: How can central banks use market surveillance tools to process and analyse large data volumes and diverse regulatory, market intelligence and market data? 

Tony Sio: Data collection, capture, normalisation and storage is an enormous task. Central banks collect structured data electronically through reporting systems and market data feeds. They pull raw data regularly from banks’ IT systems, and process it for reporting and analytical purposes. They also accept and process data that banks push to them in a specified format. In addition, they collect unstructured data through audits, phone conversations with key participants, news feeds and social media channels, all of which need to be converted to an electronic format. 

Market surveillance or suptech can help overcome data challenges. Ideally, central banks require a solution that can automatically validate and verify the integrity and quality of the data by checking for receipt, completeness, correctness, plausibility and consistency. The tool should be able to normalise transactional, reference and alerting data – to essentially reorganise it in the database so users can utilise it for further queries and analysis. It should also provide access to individual market transactions, as well as to derived and market intelligence data such as real-time outstanding positions, top-of-book, open orders at a point in time and daily totals. Furthermore, the tool should summarise the data and visually display it in a dashboard, so it is easy to interpret and understand complex relationships between related financial instruments. The tool should also allow data sharing across various systems through application programming interfaces. 

As a result, the process of managing a financial crisis could become seamless. Systematic alerting could detect unusual transactional patterns, as well as variations in prices and volumes against trends and the theoretical yield curve, which may indicate market manipulation. Solutions could have capabilities to utilise correlation between financial instruments, detect potential unusual deviations, and profile participant market activities. 

Suptech solutions are built as applications layered on existing IT infrastructure. On a global scale, the infrastructure of central banks varies considerably in terms of complexity. Generally, the more modern the infrastructure, the less time, money and effort it takes to implement the solution. 

I think there is a huge benefit to implementing a software-as-a-service (SaaS)-based market surveillance solution. In most cases, operations support, development and management teams need to allocate limited resources to other priorities. With SaaS, central banks have greater architecture flexibility and a faster time to market. Importantly, having the SaaS provider take on the burden of operating, hosting and supporting the system reduces the bank’s total cost of ownership. 

 

Central Banking: What are the additional benefits for market participants? 

Tony Sio: Market participants want to be helpful and provide data because it contributes to market integrity and fairness of the markets. However, not having the appropriate tools in place can result in scrambling to meet ad hoc requests from regulators, which causes an inefficient process for everyone involved. It saves resources and capital when central banks’ reporting requirements are clear, data (on trading positions, for example) is systematically collected, and automated reporting is executed.

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