For a number of firms, this work has allowed proportionate and appropriate surveillance to be designed and also highlighted where gaps exist that may require further development or manual surveillance techniques”.
This newsletter has set alarm bells ringing among investment firms who are raising questions with us such as:
- What do firms need to have in their surveillance program to effectively combat market abuse?
- What do the regulators expect market participants to have in place?
- What are others doing that we are not?
In order to determine what surveillance routines should be implemented to prevent and detect potential instances of market abuse, firms must first systematically identify the market abuse risks inherent to their business through undertaking a detailed Market Abuse Risk Assessment (MARA). The market abuse risks are then mapped against the firm’s market surveillance control framework to identify where gaps exist and need to be remediated and this will then drive the firm’s compliance surveillance book of work.
From our experience of working with firms to develop detailed MARAs, we found that the most effective and meaningful approach is to assess market abuse risks at a granular desk by desk level, by asset class and product type, and by each market abuse offence as detailed in the FCA Code of Market Conduct and ESMA Guidelines. However, it depends on the nature and size of the firm. This may mean identifying and assessing over 35 market abuse offences across Sales & Trading, Research and the Investment Banking private side in equities, credit, rates, commodities, FX and benchmark submissions.
Once the market abuse risks have been identified, firms should review for gaps in their trade surveillance, information barrier surveillance, voice and e-communication surveillance, compliance monitoring and testing, training, policies and procedures, governance and oversight, and business supervisory controls. A firm’s MARA should be an evolving live tool that should be updated periodically to reflect changes to the business, market, regulatory landscape and control framework.
It is essential that firms assess and document their market abuse risks in order to have effective and robust tools in place to mitigate these risks. Not least because the Market Monitoring Team at the FCA continues to strengthen its group and improve its surveillance tools and techniques. Patrick Spens heads an army of sophisticated surveillance professionals whose mission is to detect unusual patterns and potential market abuse. The amount of fines and sanctions levied against individuals and firms is unlikely to abate in the coming years and firms will want to do their utmost to avoid the regulator’s scrutiny.