Instant messaging is quick, real-time, and permits multiple simultaneous conversations. It's a powerful tool, it's become ubiquitous, and banks have had to log IM for several years now. More lightly regulated areas of the financial markets, however, such as hedge funds and the credit default swaps market, have not had the same requirements. That's probably going to change for a number of reasons.

First, the regulatory pendulum is swinging decidedly toward tightening. Never mind that the current crisis involves some of the most heavily regulated institutions in the world, more regulation, involving more sorts of financial firms, is a virtual certainty. And there's no denying that manipulation of these alternative markets clearly poses systemic risks.

The CDS market, with a notional value that reached more than $55 trillion, had essentially no oversight. It is a freewheeling culture where IM plays a big role, and prosecutors and regulators are sure to dig into IM as they investigate possible duplicity in the wake of the credit crisis.

In one of the first salvos, the office of New York Attorney General Andrew Cuomo reportedly subpoenaed trading data and other communications from eight interdealer brokers in the CDS market, trying to learn if market players spread false rumors during August and September that led to Lehman Brothers' downfall and the financial spiral that ensued.

Kailash Ambwani, CEO of FaceTime, which provides IM and archiving for nine of the country's top 10 banks, expects that legal concerns like these will push even lightly regulated players to start monitoring and archiving their IM. By doing so they can track their own employees' conversations, respond more easily to legal requests and, just as important, have their own IM logs with trading partners.

In any legal proceeding, Ambwani says, you want to bring your own evidence to the table, not have your fate in the hands of someone else's evidence. Firms must contend with public IM networks, Internet or Web-based chat, and enterprise IM that might access a public network.

At least one of FaceTime's clients used IM to prove a rogue analyst broke rules, not the institution itself, thus avoiding a hefty NASD fine. Ambwani says. Elsewhere, in a more high profile case, police investigating the trading scandal at Société Générale that resulted in loses of $6.2 billion, sifted through nearly 2,000 pages of IM traffic, which proved that Jerome Kerviel acted without authority from the bank and tried to hide his actions.

Ironically, Kerviel did not hide his actions well since he apparently did not think IM could be tracked. In one exchange, he told an accomplice: "You didn't say anything about our trades, did you? Otherwise you're dead meat." To which his accomplice wrote, "Are you nuts? It's between you and me."

Kerviel's cluelessness that his IM might be monitored (he avoided email almost completely) is an important lesson for all institutions mulling their IM policies and procedures: IM monitoring is not just to catch employees, it's to deter them. If Kerviel knew how clear his tracks were, he may never have been tempted to step out.

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