In the latest of Global Relay’s regular hedge fund compliance roundtables in London, senior figures from across the sector gathered to exchange opinion on some of the pressing issues of the moment.

The panel discussed the processes involved in streamlining expensive and inefficient services, particularly in communications, trade recording and senior manager governance. Key issues for compliance to consider during this process include insider trading and connected persons

The panel discussed the definition of connected persons, especially regarding family members, and the amount of control that is needed to classify someone as a connected person. Firms need to clarify the scope of their obligations regarding connected persons, particularly in relation to UK and US regulations.

A brief mention of the risk of insider trading by relatives was made, noting a large number of these cases involves a family member.

FCA letter to asset managers

The group discussed the FCA’s Dear CEO letter, focusing on private markets, market integrity, and related issues. The FCA has shifted towards a more collaborative regulatory approach with valuations and conflicts of interest in private markets being key concerns.

In general, the panel didn’t see anything new in the letter – the FCA was reinforcing good practice and procedure. It was also noted that the previous letter to the sector didn’t result in a Market Watch, so the hedge funds sector must be doing something right!

For more on the FCA’s concerns about conflicts of interest at firms managing private assets see our coverage on GRIP.

Market abuse surveillance

The FCA’s increased focus on market abuse surveillance was highlighted, including inquiries about spoofing and other manipulative trading practices. The group discussed their own surveillance systems and the challenges of calibrating them to reduce false positives, with a debate on the use of automated surveillance systems versus manual review. They also discussed the difficulty of proving “abusive intent” of trading practices.

STORs

The group discussed the circumstances under which a STOR should be filed, including internal versus external activity.

Points to consider:

• the balance between reporting suspicious activity and protecting the firm’s reputation;
• the importance of documenting internal investigations and justifications for not filing a STOR was emphasized;
• the link between market abuse and money laundering was brought up, along with the view that filing a SAR (suspicious activity report) may be more appropriate in some circumstances.

FCA interactions

The panel recounted experiences with FCA inquiries, noting varying levels of expertise and competence among FCA staff. The visits often felt like training exercises for junior regulatory staff. Also, where firms can show their practices and procedures in making a decision then the FCA were often appeased.

The FCA’s use of new market monitoring systems and its focus on cross-asset relationships were discussed. Also, the difficulty for the FCA in bringing successful market abuse cases.

AI tools real-life use

Firms are actively using AI tools like ChatGPT, Gemini, and Grok for various tasks, including rules analysis, policy updates, and research. They found AI particularly useful for quickly processing large amounts of information and generating summaries. There was a discussion about the importance of verifying AI-generated information, as it can occasionally be inaccurate.

AI for meeting transcription and summarization

The use of AI-powered transcription tools like Co-pilot is being explored by some firms for meeting recordings. However, there were concerns about the legal and regulatory implications of storing meeting transcripts, particularly regarding “books and records” requirements and data privacy.

The discussion then revolved around the possibility of deleting transcripts and only retaining AI-generated summaries, with some participants seeking legal advice. There was also a discussion about the use of Co-pilot, and the risks involved with sending company information to Microsoft. Because of this risk some firms are using their own internal versions of ChatGPT.

AI for process automation

The panel recognized the potential of AI to automate routine tasks, such as data analysis and basic compliance tick-box exercises. Some firms are considering implementing internal chatbots to provide employees with quick access to policy information.

They are also considering the use of AI for coding, generally agreeing that AI is a good fit for anything quantifiable.

Regulatory and legal concerns

There were discussions about the challenges of navigating evolving regulations regarding AI use, particularly in the US and UK – with the extraterritoriality of the EU AI Act having the most impact.

Concerns were also raised about potential litigation risks associated with storing and using AI-generated content. There is a particular risk around data privacy.

Firms are testing the boundaries of what data the AI can access both internally and externally.

Impact on the workforce

It was generally agreed that AI will likely change the way work is done, but also, importantly, that human analysis will still be needed.

The group acknowledged the potential impact of AI on various roles, including quantitative analysts and junior staff, particularly how AI will affect the training of young professionals.

Sanctions and metals trading

The panel discussed the challenges of ensuring compliance with sanctions regulations when trading physical metals, particularly those originating from Russia. They are seeking ways to verify the origin of metals and avoid purchasing sanctioned goods. Also, there are questions about what happens if the US drops Russian sanctions.