By Stefania Spezzati
LONDON, Jan 30 (Reuters) – JPMorgan Chase & Co. is working with KPMG to improve how the U.S. bank oversees its traders, sources with knowledge of the review told Reuters, as Wall Street grapples with how to detect potential wrongdoing during a securities trading boom.
KPMG is reviewing JPMorgan’s oversight of traders across the bank’s markets division globally, the people said. The bank’s revenue from buying and selling bonds, currencies and stocks rose to $29 billion by 2022, the largest among the top five U.S. banks and a near-record high.
Market volatility increased at the start of the pandemic, and investment banks and securities firms have seen trading activity increase, increasing the challenge of monitoring staff amid increased volumes of buying and selling and large price swings.
The CBOE Volatility Index, a measure of market volatility, remains above its pre-pandemic levels.
Asked by Reuters why it had hired KPMG, JPMorgan said: “We invest heavily in our compliance and monitoring systems and often engage third parties to benchmark our capabilities.”
“Such practices should not be taken for more than that,” the bank said in a statement.
A spokeswoman for KPMG in London declined to comment.
WARNINGS AND WARNINGS
Compliance teams at investment banks overseeing traders rely in part on alerts and warnings from automated systems to catch and prevent potential misconduct, which, if undetected, can result in costly losses for the banks and draw scrutiny from regulators.
In 2020, JPMorgan agreed to pay a $920 million fine for market manipulation at its trading desks in New York, London and Hong Kong and entered into a three-year deferred prosecution agreement with the US Department of Justice.
Under the agreement, which expires this year, the bank committed to improving its compliance efforts and reporting corrections to its supervisor, the DoJ said.
As part of their obligations to regulators, banks must report suspicious transactions to watchdogs when there are reasonable grounds to suspect bad intent, such as potential insider trading or market manipulation.
When market prices move sharply and trading volume increases, the automated systems banks use to monitor trading can produce an avalanche of alerts about unusual activity, making it harder for regulators to detect potential breaches of behavior.
One such event was in September 2022, when radical tax cut plans by former UK Prime Minister Liz Truss caused turmoil in the UK government bond market. The volatility in UK government bonds, known as gilts, triggered a flood of compliance alerts from JPMorgan’s traders, one of the sources said.
Britain’s borrowing costs posted the biggest jump in decades, forcing the Bank of England to step in with an emergency package to calm markets. Bank of England Governor Andrew Bailey said conditions in gilt trading at the time were abnormal.
KPMG has done an analysis of the technology the financial industry uses to monitor trading and is now advising JPMorgan on how to adapt its systems, another source said.
Some changes are already being tested, reducing the number of alerts to compliance departments in some trading areas, the first source said.
In 2021, the number of so-called suspicious transaction and order reports that financial services companies reported to Britain’s financial watchdog – the Financial Conduct Authority – to signal potential risks rose by 15% from the previous year, the regulator said in its latest available data. Possible insider trading appeared to be the most frequent threat, FCA data shows. (Reporting by Stefania Spezzati; Editing by Elisa Martinuzzi and Jane Merriman)
