FCA MarketWatch on Market Surveillance
FCA raises the importance of MAR compliance and sets out its guidance for firms facing operational challenges of remote working due to coronavirus
The UK Financial Conduct Authority last week released its latest newsletter, FCA Market Watch 63, which sets out its expectations of market conduct in the context of increased capital raising events and alternative working arrangements due to coronavirus.
Firms undertaking commercial dealing activities using alternative working arrangements that the FCA has made it critically important that the right controls are in place on market abuse monitoring, conduct and managing conflicts. During this period of heightened regulatory risks, the FCA has highlighted the following areas that regulatory firms must pay specific focus to:
- maintaining robust market surveillance and suspicious transactions and order reports (STORs)
- ensuring inside information continues to be appropriately identified and handled so that it is not misused and appropriately disclosed by issuers
- meeting the transparency and short position covering requirements under the Short Selling Regulation (SSR)
- identifying and managing conflicts of interest by market participants
The FCA has stated that “we will continue to use our range of powers to monitor, make enquiries, investigate, and if necessary, take enforcement action to protect the integrity and orderly functioning of the market”.
FCA enforcement actions in 2019 resulted in fines of £392 million. This represented in a 6-fold rise in fines compared to 2018. With the likelihood of a prolongation of coronavirus with a prediction of second wave of cases on the horizon, KRM22 sees the rising tide of FCA enforcement actions to continue in 2020. Fines could potentially reach the heights post the financial crises except for a few large fines attributed to a small number of cases associated with FX rigging and Libor price index market manipulation .
The FCA supervisory focus is a clear indication that despite the operational challenges of remote working, firms must ensure that they have adequate systems and controls in place to detect and report suspicious transactions. The FCA has stated its expectations that firms must have undertaken a risk assessment beforehand and an ongoing basis. In KRM22’s opinion this would entail a firm evaluating the effectiveness of its market surveillance operations, surveillance governance model, operating procedures, trade surveillance systems, communication recording and monitoring systems.
Saeed Patel, Director of Product Strategy of Regulatory Risk at KRM22, commented that “a detail risk assessment of a firms trade surveillance system is critical to ensure that the suite of suspicious trading alerts set-up are effectively configured and calibrated with parameters / thresholds updated based on the current risk profile of the firm taking into consideration of the heightened risk of remote working during these volatile market conditions”.
KRM22’s Market Surveillance system includes an integrated sandbox which empowers the surveillance analysts to back tests and stress tests new alerts parameters / thresholds with results provided almost instantaneously. Patel adds “this key activity can be undertaken by our clients without technical dependency on KRM22 to undertake this change. It is very important that firms are responsive to dynamically change alert parameters in order to reduce false positives and to improve the effectiveness of its surveillance operations – this is not a one-time exercise however continuous process in line with emergent risks”
The FCA has stated that “We are aware that increased market volumes and volatility have caused a surge in the number of surveillance alerts in a number of markets. We understand that firms are handling this challenge in different ways. Firms should ensure that their approach is tailored to the risks they are exposed to and does not diminish the appropriateness and effectiveness of their surveillance. This may include subsequent thematic analysis, or a retrospective review focusing on areas that are either higher risk or may have been masked due to the volumes of alerts”.
Patel adds “with financial market volatility rising to levels not seen since the financial crises in 2008 it is even more important than ever that firms are raising their game in market surveillance and moving towards real-time market surveillance. The ability for 1st and 2nd lines of defence to detect and report STORs as soon as events happen is an important mitigating step for firms to demonstrate strong market abuse prevention controls, to take the necessary corrective action in order contain and to limit wider market damage and to safeguard market integrity”.
KRM22s Market Surveillance system covers multiple asset classes and global markets including sell side and buy side firms. The system has been designed to operate on a real-time basis to monitor not only market abuse violations however unusual patterns of trading behaviour provide useful contextual insights of trading activities.
The coronavirus crises has caused significant disruption to the operations of financial markets. Regulators have highlighted the importance of monitoring market abuse during this period of heightened market risk. The old model of physically co-locating commercial dealing activities and 1st and 2nd lines of defence has fundamentally changed with new alternative working arrangements of remote working. This has changed the conventional compliance model of undertaking surveillance within firms requiring a re-assessment of its governance, operating and technology models.
KRM22 has in place today a full suite of regulatory products covering Market Abuse, Financial Crime and SM&CR. KRM22’s systems are underpinned by the Global Risk Platform providing a single gateway to access multiple applications and the Enterprise Risk Cockpit which provides a holistic view of compliance risk in real-time.