N.Y. BANK REGULATOR LEADS CHARGE — AGAIN
Only NYDFS has won agreements to save Symphony chat details
New York State’s banking regulator has once again demonstrated it is the most aggressive of Wall Street’s watchdogs by making sure a new chat room service for traders can’t be used to hide illegal activity.
Prior to the rollout this week of the Symphony service by a bevy of Wall Street firms, New York’s Department of Financial Services (NYDFS) won agreements from the four major bank users it supervises to preserve all communications as well as their encryption code.
Digital communications between traders have been crucial in recent years in enabling regulators to track down market manipulation and fraud that have resulted in billions of dollars of fines for the banks.
“This is a critical issue since chats and other electronic records have provided key evidence in investigations of wrongdoing on Wall Street,” Anthony Albanese, acting superintendent of NYDFS, said in a statement announcing the agreements this week. “It is vital that regulators act to ensure that these records do not fall into a digital black hole.”
Yes, it is vital that regulators act, but so far the state regulator is the only one to do so.
The NYDFS agreements were made with Goldman Sachs, the main backer of the new chat service, and Bank of New York Mellon, as well as Deutsche Bank and Credit Suisse, two foreign banks with big operations in New York.
But NYDFS only has jurisdiction over banks with state charters, and this leaves the 10 other institutions backing Symphony unbound by the agreement to preserve communications.
These include three big New York banks — JPMorgan Chase, Citigroup and Morgan Stanley — as well as Bank of America, Wells Fargo and half a dozen other banks and investment firms.
NYDFS became concerned earlier this year when the new communications service being readied by the banking consortium, which promised end-to-end encryption and guaranteed deletion service, would be used to evade regulatory review.
The Symphony service is designed as an alternative to the widely used chat room in the ubiquitous Bloomberg terminal. It is generally perceived as a reaction by Goldman and the other banks to the disclosure in 2013 that reporters for Bloomberg News had used information gleaned from the terminals to identify trading patterns at the banks.
However, Institutional Investor writer Aaron Timms noted earlier this year that traders are no likelier to trust a service still seen as largely a Goldman Sachs enterprise than they are one operated by Bloomberg.
“It’s hard enough sending them our orders, knowing they’re milking us in some way,” Timms quoted one anonymous trader as saying about Goldman. “God knows what they would do with our messages.”
There is a long history of would-be Bloomberg killers failing to achieve their goal of displacing one or another of the functions of the Bloomberg terminals — be it the vast database, the sophisticated analytics, the news service or the chat room.
It may well be that as the price of the individual terminal has risen to more than $20,000 a year and that the entire bundle being paid for may be getting little use from many customers, that there is a niche for a cheaper service that just supplies the chat function.
Symphony is poised to sweeten the proposition this week with the announcement that the Dow Jones news services, including reporting in The Wall Street Jour
nal, also will be available on the new service.
But the regulatory pre-emption by NYDFS was not making any judgment about Symphony’s prospects for commercial success. It was merely zeroing in on words like “encryption” and “deletion” and the threats they posed to bank supervision.
In addition to preserving the communications from deletion, the NYDFS agreements provide that the banks will store a copy of the decryption code, which they control, with an independent custodian.
On its website, Symphony maintains that its service is designed to interface with the record retention systems at banks.
“Symphony provides security while data travels through the cloud,” the company said last month in a blog post on compliance. “Firms then securely receive the data from Symphony, decrypt it and store it so they can meet their retention obligations.”
In insisting on an explicit pledge to preserve the communications as part of required record-keeping, the state regulator may be engaging in overkill, but it has learned that with the banks, it is better to be safe than sorry.
To the extent that federal regulators don’t follow the lead of NYDFS — or that the other banks don’t voluntarily pledge to include Symphony communications as part of their compliance with recordkeeping requirements — future evidence of illegal behavior could, as Albanese suggested, fall into a black hole.
NYDFS only has jurisdiction over banks with state charters, leaving the 10 other institutions backing Symphony unbound by the agreement.