FCA Warns Firms Over Market Abuse Surveillance

In its latest issue of Market Watch published late September, the UK’s Financial Conduct Authority (FCA) outlined a number of observations relating to market abuse surveillance. These should serve as a reminder and encourage investment management firms to review their existing policies, systems and controls in this area.

The updated guidance is based on recent visits to both firms and trading venues and highlights common shortcomings in practices observed. But what does this guidance say and how should firms best take heed?  

FCA Guidance

Perhaps the most prominent theme to emerge from the latest FCA communication is that any industry-wide shortcomings in the area of market surveillance will not excuse individual firms from their obligations. In the FCA’s own words: “we will not necessarily accept failures to comply with the Market Abuse Regime (MAR) on the basis that multiple firms are in a similar position.”

This theme carries through to the systems and arrangements that firms use to detect potential abusive behaviours or practices, the way those systems are calibrated and the frequency of suspicious transaction and order reporting. The FCA is keen to stress that firms should not benchmark themselves against their peers with regards to any of these aspects. Specifically, it notes that, “firms risk failing to comply with MAR if they assume that because a certain calibration is appropriate for their peers, it must be appropriate for them.” 

Equally, relying on standard practices regarding potential signs of market manipulation may not suffice. Annex I of MAR lists several indicators of potential abuse that firms should seek to detect. These examples include whether:

• a trade represents a large proportion of the instrument’s daily volume;
• it results in significant movement in the market price; and
• it results in no change in beneficial ownership.

However, the FCA notes that “the lists in MAR are not exhaustive; firms treating them as such may fail to identify…and so fail to detect and report, other types of market manipulation.”

The FCA also stresses that the responsibility to monitor for market abuse lies with the firm and not with specific individuals. Individuals not feeling responsible for their predecessor’s arrangements will be of “limited relevance, and we (the FCA) will not generally treat it as mitigating the firm’s failings” as individual obligations are not generally being assessed. Therefore, it is important for firms to make sure that they have adequate handover processes in place when new employees with Compliance Oversight (CF10’s) responsibilities are brought onboard.

Finally, particular attention was also paid to fixed income markets, given peculiarities that make it more difficult to carry out surveillance in this asset class. Many fixed-income instruments trade relatively infrequently, which makes it harder to benchmark both the price of a transaction and its market impact. The FCA has therefore stressed the need to use appropriate proxies and study the potential impact of transactions on correlated markets (for example, the relationship between cash versus futures, or similar instruments of different durations). Equally, it has observed some firms making more basic mistakes, such as comparing the price of fixed income transactions, when yield is the more appropriate metric to analyse.

ACA Guidance

ACA recommends that firms conduct a review of their market abuse arrangement.  In response to this latest alert, ACA has put together guidance that highlights the five key areas firms should focus on. You can access it below:

Download

How ACA Can Help

ACA offers market abuse controls review, encompassing an examination of relevant policies and procedures, evaluation of the robustness of your firms’ monitoring, an assessment of your surveillance techniques and interviews with non-compliance staff members designed to assess the effectiveness of the internal market conduct controls and the overall culture of the firm.

ACA's Decryptex^® trade surveillance technology solution can also help in this area. Decryptex provides in-depth trade surveillance to help identify items of interest and non-compliant trading and investment activity. The system offers a case management tool that can track and store emails, reports, and research related to each investigation. 

For more information, or to discuss initiating a review of your market abuse arrangements or technology, please contact Charlotte Longman (nee Malin) or your usual ACA consultant.

Additional Resources

FCA Questionnaire on Market Abuse Controls Signals Their Priorities For Investment Managers (21 August 2018)