The FCA Expresses Further Concerns on Inadequate Market Abuse Surveillance in Rates and Fixed Income
In its latest issue of “Market Watch” the FCA has expressed further concerns that, although it is five years since the introduction of the Market Abuse Regulation (MAR), firms are still not keeping up with market developments and thus failing to identify instances of potential market abuse.
In previous editions they have shared observations from their suspicious transaction reporting (STR) and suspicious transaction and order reporting (STOR) supervisory visits where they found that surveillance appeared to be insufficiently developed in some asset classes.
Web-based trading platforms:
Their latest focus is on web-based trading platforms, which are widely used for Rates and Fixed Income products. The FCA has observed wholesale brokers (operators) introducing types of electronic trading platforms to increase access to liquidity and efficacy in trade execution.
The FCA is seeing the growing use of periodic, continuous, and dark liquidity, via web-based user interface portals, matching sessions and ‘pop-ups’, often supplementing traditional services in a hybrid broking model, working alongside central limit order book style platforms within an Organised Trading Facility or Multilateral Trading Facility.
Many electronic execution platforms require formal connections and interface with a user’s trading systems and order and trade messages are systematically recorded. However, where some platform’s connectivity is made via web-based user interfaces then direct connection to users’ trading systems may not be required or connection may not even be possible.
Trade details for trades executed on web-based platforms are generally recorded in users’ trade book systems; however, users do not always systematically record the related order messages that precede execution or record those orders that do not result in a trade, including cancellations and amendments. To properly identify the potential for market abuse, capturing and monitoring orders, as well as trades, is always necessary.
The FCA emphasises that under MAR Article 16(2) firms arranging or executing transactions must establish effective systems, arrangements and procedures to detect and report potential market abuse and they are concerned that users of web-based platforms may not be able to monitor all their orders to comply with that requirement. Orders are a critical component in effective monitoring for certain types of market manipulation, e.g. layering and spoofing
The FCA also found that some Compliance/Surveillance teams were unaware of the platforms used by their front office staff or showed a lack of knowledge of the amount of business undertaken on them, which meant they potentially weren’t aware of the associated market abuse risks.
They also saw instances where firms had undertaken detailed and extensive internal risk assessment and yet did not include business entered on web-based platforms, particularly where orders were deleted or otherwise did not result in a trade.
Where Compliance/Surveillance is unaware of the different platforms or how much business was placed via such platforms the FCA will question whether a firm has appropriate surveillance in place and whether it can properly assess the market abuse risks it is facing. A weakness in capturing complete trade and order data also leads the FCA to believe that these firms will not be meeting UK MiFIR Article 25(1) which requires investment firms to keep all orders and transactions for five years.
Firms are also reminded that they should consider how they will meet their market abuse surveillance and record-keeping obligations when onboarding new platforms and formally build those into their formal new business approval procedures. Failure to do so may leave them in breach of their regulatory obligations under MAR.
Lastly, the FCA stresses that firms cannot justify failing to meet their obligations under MAR because they believe peer firms are in a similar position and it should not be assumed that the FCA will not take Enforcement action.
Firms should treat this strongly worded Market Watch as a ‘you have been warned’ notice and review their processes to ensure that they are capturing and monitoring all orders and transactions to detect and report potential market abuse.
FMCR has extensive trading floor and regulatory experience in reviewing how clients capture and monitor orders and transactions together with their arrangements and procedures to detect and report potential market abuse. Please get in touch at contact@fmcr.com for more information.