Growing Sanctions Complexity Causes Headaches for Traders

Robust global sanctions data could be the next big pain point for trading firms, as actions against countries and businesses become both broader and more complicated.

Banks and trading firms are under pressure to show regulators they understand the deals they are making. From knowing their customer to preventing money laundering actions, companies need to understand all the intertwining relationships in transactions, including if a security has connections to a country, entity, or individual in an official sanctions list.

Joel Kornblum, head of strategic alliances at Eagle Investment Systems, says clients have a harder time keeping up with the new information.

“I think it’s going to become more and more relevant with the moving target of sanctions happening globally,” Kornblum says. “We hear from our clients how difficult it has been for them to keep up and some told us that this is something they cannot do manually anymore.”

He adds companies are ready for a bigger conversation on how to deal with sanctioned securities and how to ensure their trades meet standards.

Ensuring securities are not in any way involved in any sanctions is not new for traders. But prohibited trades no longer only cover countries. Increasingly, governments have placed sanctions on sectors like the oil industry and even individuals connected to certain people.

John McManus, head of sales Americas, Financial Information for SIX, says the complexity of sanctions made it difficult for traders to get a clearer picture of their trades.

“The concept of a do-not-trade list is not new; many firms have had this process in place for years. But when the military conflict between Ukraine and Russia occurred, it introduced a lot of ambiguity into the process since many of the sanctions were sectoral,” McManus says. “Firms tried to do their own tracking but it fell short, and they’re realizing they need better monitoring of sanctions.”

But while sanctions began to show shades of gray back in 2014 when Russia annexed the Crimean Peninsula as part of an escalating dispute with Ukraine, it was not until 2017 where most firms saw the need for a sanctioned securities data service.

“After Venezuela, we had a lot of customers, it was the tipping point where firms realized they needed to have a service that can protect them, where they can show a regulator that they were acting in the best faith possible to identify potential sanctioned securities,” McManus says. “I think clients realized that they weren’t in a position to keep up with the wave of sanctions.”

Global sanctions continually change as governments negotiate deals and sometimes quietly remove entities from their lists.

SIX offers its Sanctioned Securities Monitoring Service which it started in 2014, back to Russia’s invasion of Ukraine. It has since shifted its focus away from just Russia and expanded its monitoring securities around the globe. It has around 50 clients, mainly in the US and Europe, monitors approximately 6.7 million instruments and takes in information from regulatory bodies in the European Union, Hong Kong, the United Kingdom, the US, and the United Nations.

SIX announced in May that it would be offering the global sanctions dataset on Eagle Investment Systems’ platform.

Eagle is also in the process of figuring out how to present and analyze the data so clients can more closely track relationships of securities.

McManus notes banks are cautious about the reputational impact of their trades. And as more complicated legal issues become involved in specific securities, databases that continually track topics like sanctions or even the broader environmental, social and governance sector become pain points they need to address.