Supervision of Markets businesses – the independent review

The previous blog on 10 August 2021 looked at some of the measures we use to establish the performance of desks and larger units in market businesses. We use a range of calculations from readily available data to establish the type of desk and therefore the expected performance. In some cases, this aligns well with the expected strategy while at other times it may not!

This blog looks at the ways the performance reviews can assist managers and senior managers.

Effective supervision

The actual performance and sources of revenue are sometimes difficult to uncover using established processes. Put simply, some experienced staff can find very effective ways to disguise the true strategies to create revenue when oversight processes are well understood and any gaps are well known. This can be as benign as internal arbitrage, exploiting a monopoly or a dominant market position. In other cases, the revenue is derived from ‘scope creep’ where the original purpose of the desk has drifted over time to follow other strategies without explicit agreement from managers.

Alternatively, this can result less innocent practices such as fraud. There have been a number of well documented cases where knowledge of internal oversight practices can enable fraudulent activity.

Regulatory supervision such as the Senior Manager Regime (SMR, UK) and Bank Executive Accountability Regime (BEAR, Australia) have increasingly focussed on effective oversight from senior managers who are expected to be informed about the businesses under their control. Unless senior managers take reasonable steps to understand and test businesses under their supervision the regulatory system may find them responsible for any problems.

The challenge for senior managers is how to get information and analysis on their supervised businesses.

Independent review

Independent review is an important method for gathering information by looking at existing processes with new insights. The usual internal reviews are not simply re-used and adapted slightly for the current focus areas of the business. Rather a different approach is typically employed by independent reviewers which can add to the information generated from the regular oversight.

In addition to new ways of looking at existing businesses, an independent firm will not have the restrictions which can be problematic for staff members. Internal oversight can often follow a very predictable path which has been established for some time. Lack of time and a focus for efficiencies can leave businesses using analysis and oversight practices which are out of date and/or without review.

Internal relationships and politics can also make reviews difficult for staff. Who wants to create internal resentment and additional work?

Independent firms are not aligned with internal parties and bring external experiences to the review process which can provide different and unique insights. It is this approach which can greatly assist senior managers demonstrate effective oversight.

Changes over time

Most desks change their trading and sales approach over time to suit changes in market conditions and customers. This is normal and expected. But is the current strategy and performance still within the expectations of senior management?

Our independent performance reviews look at these changes over time. The product mix, customers, trading patterns and key days are all analysed for their impact on revenue and whether they have adjusted to different trading conditions.

For example, the relative use of linear and non-linear products is quite dependent on market volatility and direction: is this reflected in the desk performance? Is there preference for a desk to be ‘long’ or ‘short’? This can be quite indicative of trading strategies and often the use of the balance sheet advantages to augment revenue.

Does being in the office or working remotely matter?

This section of any review is relatively new because pre-COVID, working remotely was very rare for trading and sales staff. But now it is a reality for many businesses with all or part of the desk regularly working from home.

In the highly scrutinised environment of a trading room, oversight is clear and immediate. Despite the increasing use of monitoring software for computers and other devices, it is much easier for staff to use unauthorised information sources to assist in trading and sales. A private phone or tablet is very much ‘off the grid’ and cannot be effectively banned from a home office in the way they can from the trading room.

If there has been a change in trading or sales approach (and this can be very subtle) it can often be detected in the change of performance from in-office to remote location.

This is one test we have recently added to the review based on changing market conditions.

Effective and demonstrable oversight

The focus of the performance review is to provide a view of the past, current and change in desk performance and strategy of desks. The independent review does not replace the internal reviews: rather it is designed to compliment them by adding a different analysis of the same data.

The obligations on senior managers for effective and demonstrable oversight can better met with this combination of internal and periodic external review.

Summary

An independent performance review of a desk or small combination of desks is where the Martialis approach makes most impact.

Many reviews are done across wide businesses and focus on opportunities and risks for those businesses.

We look at the micro level. Close, forensic investigation of desk performance can assist senior managers making strategic decisions on products and customer groups in the context of the whole business while providing clear evidence of effective supervision.