FCA Market Watch 68: Mind the Surveillance and Compliance Gaps!

The FCA recently issued Market Watch 68, the latest in its newsletters on market conduct and transaction reporting issues. This edition focuses on platforms used for rates and fixed income product trading, in which the FCA express concern about gaps in surveillance, particularly in relation to this type of trading and products.

Previous Market Watch newsletters covered record keeping, risk assessments, surveillance as areas that the regulator has identified as less developed in certain asset classes and that increases the chance of potential market abuse. The FCA states it will continue with visits to firms and trading venues to assess surveillance arrangements to address this perceived growing risk.

What’s more, the regulator states that it is concerned that Market Abuse Regulation (MAR) requirements are not being met five years after the obligations were introduced.

Monitoring, reporting and compliance gaps

The FCA have observed operators introducing types of electronic trading platforms to increase access to liquidity and efficacy in trade execution, seeing a growing use of periodic, continuous, and dark liquidity, via web-based user interface (UI) portals, matching sessions and ‘pop-ups’. 

When using these systems, trade details are recorded, but order details or messages that precede executions – including those where orders are cancelled or amended – routinely are not. This raises a question about firm’s compliance with MiFID II record keeping compliance as well.

As a result of the lack of order data capture, the regulator has identified that there is a gap in many firms’ surveillance systems.  

Monitoring order, as well as trades, is an explicit obligation. It is especially important to consider unexecuted orders when looking at marketing manipulation offences, such as layering and spoofing.  Without order data, firms haven’t got the whole picture, meaning it runs a risk of not being able to identify abusive behaviours. Getting data from these platforms into a format suitable for surveillance is also identified as an issue. 

The FCA also comments on the gaps within many compliance and surveillance teams, flagging a disparity in knowledge in terms of the platforms used for execution and how the surveillance is deployed. The regulator feels there is inadequate risk assessments to cover all market abuse risks across instruments, behaviours and methods perspectives.

Rationales for failure called into question

Some firms consider that their own failings can be excused by a perception that some of their peers are failing in the same way. The FCA remind the market that “We reiterate that our previous acknowledgement that industry in general faces specific challenges will not lead to us accepting failure to comply with UK MAR because other firms are in a similar position. Also, where we have not published Enforcement action on particular failings, firms should not assume we will not take appropriate Enforcement action. We decide how we resolve failures to comply with UK MAR based on a number of factors. Many of these factors will vary between firms, even apparently similar firms within the same industry peer group.”

This latest market watch not only serves as a warning to investment firms regarding their execution and surveillance arrangements but also to market operators that they need to not only consider how to help users, but also have their own obligations to undertake effective monitoring to prevent, identify and report market abuse.

Our guidance

For firms trading these instruments via electronic platforms we recommend that you:

1. Think about your order data, and ensure it is appropriately captured.
2. Revisit market abuse risk assessments to see if venue types as well as behaviours and instruments are covered. 
3. Enhance your market abuse surveillance, where necessary.

Questions

Our experienced market abuse team is on hand to help you understand what these latest warnings mean for you and to provide support for your ongoing regulatory challenges.

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How we help

We offer a range of offerings designed to help you address the challenges raised in the regulator’s newsletter. These include:

• FCA Marketing Abuse Regulation (MAR) Solutions: offering a focused and cost-effective assessment of your firm’s policies, procedures, monitoring program, surveillance techniques, and controls environment. We can also provide a deep-dive review, benchmarking, and testing of your firm’s market abuse arrangements.
• ComplianceAlpha® Market Abuse Surveillance Solution: for an automated, in-depth trade surveillance to help your firm identify items of interest and non-compliant trading and investment activity.
• ACA Training Solutions: a range of open courses designed to help you and your team understand your compliance responsibilities, as well as your firm’s policies and procedures