Control rooms: practice and procedure — part one …

1 Control rooms: practice and procedure part one Nikolas Holttum Nik Holttum is a UK solicitor and currently Director, Legal & Compliance for the European offices of BMO Financial Group Who needs a Control room ? The simple answer is: any financial services firm that is running both a large securities firm, or asset management arm, and a banking arm that will be regularly in receipt of inside information. To manage information flows and avoid any appearance that sensitive information is being abused, Chinese walls must be erected internally. Other types of organisations are, of course, expected to keep track of inside information.

2 If they are not an integrated firm, however, the burden of record keeping and monitoring will be lower. Why? Regulators expect integrated firms to have proper systems in place to ensure that inside information available to the banking side does not leak into, or is abused by, the securities side. Latterly, the regulators focus has been on conflicts that can arise as a result of running these two types of activities side by side. What? Integrated investment firms have led directly to the development of the Control room function we see today; however, the Control room has a much broader remit than just monitoring an institution's Chinese walls.

3 Regulatory focus Regulators are taking an increased interest in Control rooms. The Securities and Exchange Commission specifically focuses on Control room activities during exams. Other regulators tend to review it as part of inspections on other issues. Control room structure and role of a global head Any large integrated firm will require a Control room in each of the three main financial time zones (Europe, Asia Pacific and the Americas) to provide sufficient coverage. Larger firms may well have more than one hub in each time zone. role had one main objective: to ensure that, regarding the critical tasks of the Control room , Deutsche Bank had as consistent and efficient a process as possible.

4 This involved: analysing the mechanics of how tasks were being completed to streamline the function looking at the IT infrastructure to see how this could help to improve the Control room processes and deliver on its objectives introducing management metrics to identify how effectively the Control room process is being managed Traditionally, focus on processes has been the domain of the manufacturing and service industries. Application of these process analysis techniques to compliance is relatively new. The biggest challenge is often convincing compliance professionals of the need for such analysis and change.

5 Most are extremely smart and are tough debaters when it comes to agreeing to a standardised process. The key is to make the processes flexible enough to cater for the variety of the task imposing a rigid process on Control room activities in most areas is a mistake. Whatever the challenges of establishing a reliable process, it is essential to do so in order to deliver a consistent service to the business and to manage the competing demands on the Control room . The teams in the business operate globally and they can easily identify when the Control rooms are inconsistent; this undermines the function's credibility.

6 In addition, regulators are taking an increased interest in Control room activities. The regulators' focus is, by and large, regional at present but their focus on global consistency is increasing as they become more familiar with the function. If a bank's securities monitoring is not carried out consistently on a global level, then it will potentially have weaknesses in its monitoring of Chinese walls this could affect any region because business teams operate globally. An effective Control room reduces the risk profile of the compliance function and regulatory risk itself.

7 Defining responsibilities Before any analysis is carried out, it is important to define the core objectives of the Control room function and the responsibilities that flow from these objectives. The Control room can be a graveyard for all sorts of tasks but the function must be disciplined and focus on its core objectives. If a task belongs to a different part of compliance or any other part of the business then it needs to go back there. A critical document in this regard is a responsibilities statement which can be shared with compliance colleagues and the business.

8 Only by repeating messages will they sink in. The core objectives of the Control room function will vary from house to house but below are some suggestions: Control room objectives Help to prevent and detect the misuse of unpublished price sensitive information through the administration and monitoring of the bank's Chinese wall procedures . Advance compliance with specific securities laws and/or bank policy relating to trading and research restrictions. Detect, escalate and help manage potential conflicts of interest between different divisions of the firm.

9 Provide advice to the business, legal and compliance on the above. Control room tasks The function must define a core set of tasks that help to meet each of the above objectives; these are the process activities that may require greater analysis and re-engineering. These tasks will be discussed later in this series. Although a process activity may help achieve a Control room objective, it does not follow that the process must be carried out by the Control room itself. It may be that the activity can be better performed by the business, or even sent off shore.

10 Improving the process There are a number of different ways to improve the process but all of them will, at some point, involve inviting the main stakeholders (the regional Control room heads) to meet, discuss and agree the way forward. A certain amount of negotiation can be carried out by phone and videoconference but face-to-face meetings are essential for gaining quick agreement and compromises. Documenting and reviewing the process is essential and needs to be worked on continuously. Constant reminders are necessary to stop people from falling back into old patterns.