FCA Market Watch 69: Focus on Market Conduct and Transaction Reporting

Author

Marc Salter and Charlotte Longman

Publish Date

Type

Compliance Alert

Topics

  • Compliance
  • RegTech
  • FCA
  • Trade & Transaction
  • Trade Surveillance
  • ComplianceAlpha

The FCA (Financial Conduct Authority) recently published its Market Watch 69 newsletter focusing on market conduct and transaction reporting issues.

The regulator shares useful insight into how small and medium sized market participants identify and report potential cases of market abuse as required under the Market Abuse Regulation (‘UK MAR’). This version of Market Watch builds on previous issues of the newsletter where the FCA highlighted observations from its supervisory visits to firms covering suspicious transaction reports (STRs) and suspicious transaction and order reports (STORs).

Risk Assessments:

The FCA comments on the wide range of methodologies and approaches used by firms when performing risk assessments, highlighting the importantance of firms to be methodical in their approach to these evaluations. Firms must think carefully about not just the types of market abuse specifically identified in UK MAR, but to consider each type of behaviour or subcategory of market abuse and examine their internal business model to identify where these different types of risk could occur. Firms need to understand the complex nature by which they interact with other market participants, the asset classes they trade, and the ways in which those instruments are traded, and not necessarily take a one size fits all approach to assessing these risks.

We believe it’s vital to perform a thorough breakdown of your business to identify where risks may lie and implement controls to help mitigate those risks. Similarly, fulsome risk assessments are important in order to develop a robust monitoring framework, which should consider your business as it stands today and be flexible enough to react to both market and business changes.

Order and Trade Surveillance:

The FCA is quick to call out the huge strides made by several firms and system providers in their approach to meeting the UK MAR obligations, but highlights that there is a widespread approach across the industry. This varies according to the type of market participant where in the firm surveillance is currently being undertaken (e.g., 1st Line of Defense within a large bank or by legal and compliance within a boutique asset manager).

Likewise, the regulator highlights that vendor systems have evolved and now provide firms with the ability to take a more focused approach to the calibration of parameters. This is a clear expectation as the FCA specifically highlights those firms which consider the different characteristics of asset classes and instruments before setting parameters as a positive. Simultaneously, they call into question the effectiveness of the monitoring conducted by those firms which apply generic calibration across asset classes where the nature of the instruments is significantly different. One specific setting that the FCA highlights as being ineffective, even when market abuse risk assessments highlight insider dealing as a key risk, is the ‘lookback period’; not adjusting this setting to an appropriate period inhibits the effectiveness of any system employed.

As discussed in previous Market Watch editions, the FCA re-emphasises the importance of monitoring all orders as well as trades, specifically those that don’t result in a trade due to their ability to assist in identifying market manipulation.

A final point of note is that calibration of the system should not be done as a one-and-done approach, but compliance teams should have a repeatable process of re-assessment to maintain system effectiveness.

Performing Surveillance:

Many individuals may be involved in surveillance; all must be adequately trained and the tone from the newsletter suggests that the FCA favours a hybrid approach to monitoring where it rests between both the front office and a compliance function which is independent of the first line of defence. The FCA suggests that this approach will ensure that surveillance is conducted in a way which is free from conflicts, provided that market abuse training is effective and tailored to the firms business activities, asset classes, and client types.

The FCA reminds us that although firms may choose to outsource their surveillance obligations to a third party or have teams in other jurisdictions investigate potential systematic output on their behalf, the responsibility is still with the entity subject to UK MAR, and any outsourcing that is undertaken must be done in a controlled way. Ensuring those individuals performing the surveillance function have detailed knowledge of those obligations, system calibration specifics, and market nuances will make the surveillance effective. These processes should be supported by adequate oversight and governance arrangements.

Policies and Procedures:

The FCA advises firms to continue to enhance their policies and procedures so they are more descriptive in their approach, but to also find the balance between being too prescriptive or vague. Ensuring the right level of detail in documentation will assist in ensuring a consistent understanding of the obligations arising from UK MAR.

Reporting Obligations:

Reporting obligations are outlined explicitly in the regulation, requiring submission of a STOR without delay once the reasonable suspicion threshold has been reached. The FCA specifically reminds readers that this is applicable to, and expected of, questionable behaviour performed by employees of regulated firms, as well as clients, and that submission of any STOR should not be delayed by any internal investigations. Conclusions of any internal investigations can be communicated to the FCA at a later date.

Similarly when considering client behaviours, firms should ensure that where they have knowledge or reasonable suspicion that a trade will constitute market abuse before execution to consider whether it is appropriate to execute that trade. Submission of a STOR following an execution is not always sufficient to satisfy regulatory obligations, and therefore training should be provided to employees on situations around when and how to refuse to act on behalf of a client.

The FCA makes it clear that firm's market abuse arrangements, including surveillance, risk assessments, and policies and oversight controls, are in its sights. Working with a trusted partner with the regulatory technology and consulting expertise gives firms the best steer to navigate the complex myriad of regulation and stay on the right side of the regulator.

How we help

ACA’s Market Abuse Technology Solution provides automated 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. Request your demo today.

Our compliance team is also available to help you review and implement your policies and procedures, or perform an evaluation of your market abuse arrangements, to make sure they are in line with regulatory expectations. Additionally, our training team in London has a range of open and customisable training courses available to help you and your team meet and staying up to date with your statutory and regulatory obligations.