Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

We must not mandate retention of all digital communications

After careful thought, I now think that it is a bad idea to mandate that regulated entities should store and retain records of all digital communications by their employees. Juicy emails and instant messages have been the most interesting element in many prosecutions including those relating to the Libor scandal and to foreign exchange rigging. Surely it is a good thing to force companies to retain these records for the convenience of prosecutors.

The problem is that today we use things like instant messaging where we would earlier have had an oral conversation. And there was no requirement to record these oral conversations (unless they took place inside specified locations like the trading room). The power of digital communications is that they transcend geographical boundaries. The great benefit of these technologies is that an employee sitting in India is able (in a virtual sense) to take part in a conversation happening around a coffee machine in the New York or London office.

Electronic communications can potentially be a great leveller that equalizes opportunities for employees in the centre and in the periphery. In the past, many jobs had to be in London or New York so that the employees could be tuned in to the office gossip and absorb the soft information that did not flow through formal channels. If we allowed a virtual chat room that spans the whole world, then the jobs too could be spread around the world. This potential is destroyed by the requirement that conversations in virtual chat rooms should be stored and archived while conversations in physical chat rooms can remain ephemeral and unrecorded. Real gossip will remain in the physical chat rooms and the jobs will also remain within earshot of these rooms.

India as a member of the G20 now has a voice in global regulatory organizations like IOSCO and BIS. Perhaps it should raise its voice in these fora to provide regulatory space for ephemeral digital communications that securely destroy themselves periodically.

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