Food for Thought: Exiger & IIB Seminar on Transaction Monitoring
"Food for Thought" is a series showcasing insights and best practices from Exiger's roundtables, where senior financial services professionals and industry thought leaders come together to discuss the latest industry developments over a bite to eat.
Exiger’s Jon Ball and Peter Weitzman joined regulators and senior compliance professionals at our co-hosted IIB Seminar on Transaction Monitoring. Panelists from the Federal Reserve Bank of New York, Office of the Comptroller of the Currency & New York State Department of Financial Services, along with Barclays, China Merchants Bank & United Bank For Africa PLC, discussed regulatory expectations and industry best practices for performance improvement.
Our key takeaways from the IIB breakfast panels? Here’s what you need to know:
Regulators continue to focus on the core requirements of a financial institution’s transaction monitoring system (comprehensiveness, fitness-for-purpose and operational effectiveness) but recognize that the fast pace of innovation currently sweeping the financial services industry requires financial institutions to adopt flexible approaches to meeting model validation requirements.
- As new machine learning and artificial intelligence solutions gain increasing prominence, taking a practical and tailored approach to model validation will likely prevail over trying to satisfy line items in existing regulations. (See Federal Reserve SR 11-7 and OCC 2011-12)
- Model validation protocols should be tailored to accommodate anticipated innovation, with the caveat that firms must remain diligent and fully compliant as they devise creative, technology-enabled solutions (Read More on Model Validations)
- Regulators continue to emphasize the importance of internal audit proactively identifying potential areas for transaction monitoring improvement during the audits and examinations. Financial institutions should continue to ensure that the third line is actively overseeing NY DFS 504 certification and model validation, particularly now that NYDFS 504 frameworks are of sufficient maturity that regulators can focus on the efficacy of transaction monitoring programs. Financial institutions are encouraged to leverage their internal audit and DFS 504 frameworks to ensure appropriate risk management and proactive identification of potential areas for improvement.
- The key to a successful shift to 2nd-generation, analytics driven transaction monitoring solution is understanding your financial institution’s current and near-term risk exposure and being able to demonstrate how artificial intelligence and machine learning solutions can improve the effectiveness of your transaction monitoring environment.
- Approaches to transaction monitoring optimization require looking beyond tuning thresholds. While tuning a transaction monitoring system can lead to significant efficiency improvements, other approaches should be considered. Network graph analytics, keyword analysis, trusted pairs identification, and overlays can be considered to reduce alert volumes. Robotics solutions, automated negative news searches (like DDIQ), or other automated data aggregation steps can significantly reduce the amount of time an investigator spends per case, and ensure that they are spending their time on tasks that require an experienced investigator’s judgement, rather than menial data compilation work.
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