Financial Traders Are Getting Their Coronavirus Test

(Bloomberg Opinion) -- Efforts to contain the spread of the novel Coronavirus are prompting a slowdown that poses the biggest danger to the world economy since the financial crisis, according to the OECD. Stocks last week suffered their biggest selloff since 2008. But the market dislocations aren’t the only virus perils to rattle Wall Street’s traders and their colleagues in overseas financial hubs.

Grappling with an outbreak that could become a global pandemic is adding unprecedented complexity to the day-to-day running of banking institutions that are vital to facilitating the exchange of financial assets.

Banks everywhere have been testing the ability of their traders to work at specially designated offshoot offices away from city centers, or from home. But with governments talking about more possible lockdowns, this may soon become essential. The breaking up of hubs to shield traders from the virus would be a huge test of the operational resilience of an industry that accounts for at least $160 billion of the big banks’ revenues. Trading depends on access to cutting-edge technology, demands tight regulatory oversight and thrives on the physical proximity of staff.

Regulators will also have to decide how far they’re willing to soften controls — by allowing people to trade from home or elsewhere — to ensure the uninterrupted functioning of markets. A serious pandemic would give trading risk a fresh dimension.

Calamities such as the 9/11 terrorist attacks on New York have already prompted securities firms to plan for anything from wars, to floods, to cyber-attacks hitting their core activities. But a pandemic is different, given its global nature: Banks have suddenly found themselves having to think about reorganizing businesses on two continents. Shanghai, Hong Kong and Seoul have been at the forefront of these deliberations, with Milan joining them last week. London and New York could follow, with cases emerging in the financial system’s two most important centers.

This isn’t to say that pandemic planning has been ignored. In the U.S., the Federal Financial Institutions Examination Council has required banks to create such plans for more than a decade. For the past couple of weeks, some big banks have been rotating teams of trading staff to work remotely to make sure the systems and checks are robust. But this hasn’t been a full real-world test yet.

Even if banks can move staff to different venues, away from virus hot spots, to handle transactions typically executed under one roof, they might not be able to process the same volume of deals. Firms may have just one or two disaster recovery sites that fully replicate their main operations. Currency and equity trading rely heavily on electronic execution, which needs state-of-the art communications. Working from home would be harder still. Access to office trading platforms via virtual private networks requires ultra-reliable, high-speed internet connections and cyber-security resilience. 

Then there’s the issue of controls and compliance. While bankers advising on mergers or fund-raisings can liaise with clients from remote locations, traders operate under strict oversight. Their phone calls are taped in the event of any mistakes, and their conduct is monitored closely. There may be a point beyond which firms’ compliance authorities may constrain their ability to break up groups.

Some European banks are already in talks with regulators to allow traders to work from home, according to the Financial Times. In Hong Kong, the Securities & Futures Commission has invited firms to speak up should they have operational difficulties. “There are regulatory oversight challenges associated with working from remote locations,” the Association for Financial Markets in Europe, an industry body, said by email.

Regulators will need to weigh up the impact on confidence and liquidity that shutting down parts of the market would have if traders were out of commission, versus the risk of letting banks ease up on their surveillance. The market-rigging scandals that embroiled firms and the multi-billion dollar losses of rogue traders at Societe Generale SA and UBS Group AG will be fresh in supervisors’ minds. There’s a good reason why traders rub shoulders in large, open-plan offices where information flow helps avoid mistakes and behavior is monitored.

It could well be that securities firms have it all worked out, and that trading can continue largely unaffected. In China, equity and debt markets haven’t been affected much by remote working. But the splintering of traders will increase costs and vulnerabilities.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2020 Bloomberg L.P.

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