In 2011, the UK implemented regulation mandating the recording of all mobile communications related to the execution of trades. As of December 21, 2013, firms in the US must comply with similar mobile recording requirements, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Alex Tabb,
Partner & COO – TABB Group
Voice Recording: It’s All About the Trade. Well, mostly…
Typically, when we talk about compliance, we stress the importance of taking a holistic view – looking beyond the specifically spelled-out requirements in an effort to consider the bigger picture and position for the future. Well, when it comes to complying with the new requirements that the CFTC has put forward on voice recordings, Regulation 1.35(a) in the swaps market, the opposite is true. In this case, market participants need to focus on the underlying intent of the regulation – namely, the ability to reconstruct swaps trades, from cradle to grave, upon demand. To accomplish this, firms need to focus on the trade.

Unlike our counterparts in Europe – which are now required to record all voice communications, including mobile communications for swaps traders – in the US we only need to focus on the communications that lead to the execution of a deal. The problem is that, for now, there is no underlying technology that can magically determine which mobile calls are trade-related and which are not.

This presents a significant challenge for the industry; fortunately, there are a number of solutions out there that can help firms meet the Dec. 21, 2013, implementation deadline. But not all mobile voice recording solutions are created equal. The key for market participants is that they need to focus on the regulatory requirements and not on the potentially broader implications of the transparency effort.

In other words, instead of worrying about recording all swaps traders’ voice communications, US swaps market participants – specifically FCMs, introducing brokers (which generated more than $5 million in total aggregate gross revenues over the preceding three years from their activities as IBs), retail foreign exchange dealers, members of a DCM or SEF, commodity trading advisors, and floor brokers trading for others – should worry about whether they can in fact reconstruct a trade if called upon to do so. Again, the regulation is very specific about its requirements: The above described market participants must record all oral communications that lead to the execution of a “commodity interest” transaction or related cash or forward transactions.

When the language surrounding CFTC Regulation 1.35(a) was initially released, market participants quickly realized that implementing a solution would stretch their capabilities to the limit. Existing technologies capable of meeting all aspects of the requirement simply did not exist. We were not surprised to learn that many within the industry started looking for the easy way out – namely, the development and implementation of a rules-based approach that banned the use of cell phones in the swaps trading environment. Their reasoning was simple: Given today’s BYOD world, it is significantly easier to ban the use of cell phones than it is to fund, develop and implement all the necessary technology needed to track, record and tag mobile voice recording necessary to fulfill Regulation 1.35(a)’s requirements.

The shortcoming in this logic is that while it is one thing to ban traders from using their cell phones, it is entirely another challenge to enforce the ban. Mobility and the use of mobile communications are the future. Banning mobile device use, while theoretically possible, will adversely impact trader productivity and profitability; in addition, it will get increasingly more difficult to suppress this activity as time progresses. Furthermore, based on the specific language of CFTC regulation 1.35(a), regulators may not find mobile device bans to be sufficient. Swaps participants need to demonstrate that they can produce, on demand, the cradle-to-grave records associated with a given swaps trade, including voice calls. While telling your traders not to use cell phones may avoid the need to store mobile voice recordings, when Uncle Sam demands all of the records associated with Trade XYZ, you as a participant had better be in a position to provide the documentation to satisfy the request, and to prove that you have the proper procedures and safeguards in place.

Given that policy alone will not solve this problem, what should market participants look for in a solution? Based on a number of conversations I had while moderating a recent BT/Truphone breakfast event, it looks like a “defense in depth” strategy around recording just the calls of those involved with swap trades is the only way to go. Again, institutions in the US that trade swaps need to look at the underlying requirements of CFTC Regulation 1.35(a) and develop a targeted approach that captures swap traders’ voice recordings and exposes the metadata around those calls so they can be accurately tied to a specific trade. This way, if the regulators come knocking at your door with a trade reconstruction “request,” you can prove your compliance efforts.

When it comes to the policies, the most important factor is to ensure that if traders use mobile communications to conduct trades, they do so on devices that are in fact being recorded.

While there are a number of ways to record mobile device calls, switch-based recording seems to be winning out. Initially, many market participants looked to software-based solutions (aka, apps) to try to accomplish the task at hand. The apparent benefit of app-based solutions is that they are relatively easy to roll out and can be quickly loaded onto anyone’s mobile device.

While this seemed like an ideal solution for a BYOD environment, the downside of apps outweighs their benefits. Specifically, app-based solutions require manual intervention – the user must manually activate the app to record the call. Additionally, the mechanics of app solutions significantly deteriorate the overall user experience, and market participants soon learned that overall user experience correlates directly to app activation. Finally, the logistical challenges associated with deploying and updating an app across multiple platforms (iOS, Android, Windows, Blackberry, etc.) are significant and require continuous resource deployments over time.

Given the poor performance of the app-based solutions and the ineffective nature of a policy-based solution, institutions have realized that the only real alternative is a hardware-based solution that records calls at the switching layer. With a hardware-based solution, institutions migrate the targeted phones onto a single mobile device provider that offers mobile call recording at the network level. To accomplish this, a user swaps out his or her device’s existing SIM card with a SIM card from the preferred vendor that supports mobile voice recording. The recording occurs off the device (at the network layer) and as such does not impact phone performance or user experience.

Unlocking a mobile device is not difficult; it only requires that the user buy-out his or her contract, transfer the number to the new carrier, and physically switch out the SIM card. With SIM card-based recording, all calls sent or received on the device in question are recorded at the switch, and the call data is stored either with the carrier or by the institution itself. 

What makes this option so effective is that it neither relies on user activation, nor degrades the overall user experience, and as such, is guaranteed to capture all trader voice calls.

While SIM-based recording solves the basic problem of mobile voice recording, however, implementing it effectively still means that a number of challenges have to be overcome. For BYOD institutions, this means buying out and switching all of your traders’ existing cell phone contracts and providing them with your preferred vendor’s SIM cards. For firms with fixed contracts with mobile providers, it means breaking out any traders involved in swaps trading and porting them over to a carrier that can provide the services necessary to meet Regulation 1.35(a). 

The real challenges, however, have little to do with the technology, but everything to do with finding the correct carrier. Few US-based carriers offer the call recording functionality that Dodd-Frank mandates. Fortunately, our compatriots across the sea have more experience with this sort of technology. Thanks to the FSA’s 2011 mandate that all calls, including those made on mobile devices, be recorded, a number of British providers have successfully set up shop here in the US and are now providing services to the sector. The trick is finding a single provider that has the experience, technology and service offerings to provide the full depth of services necessary to meet the CFTC regulations regarding trade reconstruction.<

While important aspects of Regulation 1.35(a) still have to be worked out – such as how firms are going to actually tag and align calls to individual trades – the technology aspects of recording mobile calls have been solved. The key for market participants is finding the right vendor, one that understands that in the end, it is all about the trade and trade reconstruction.