The UK Financial Conduct Authority (FCA) has published the latest issue of Market Watch. The 68th edition of their newsletter covers a lot of ground, highlighting gaps in surveillance, particularly around the capturing of order data and the governance of platforms for rates and fixed income trading.
Despite these points of focus, perhaps the important point made in this newsletter comes in the form of a stark and overarching warning:
“Requirements for market abuse surveillance are still not being fully met, 5 years after the introduction of the Market Abuse Regulation (MAR) in 2016.”
What’s the reason behind this warning? What parts of surveillance are falling through the net? And what can firms do to ensure compliance? This article covers the key areas discussed in Market Watch 68.
- Financial Conduct Authority, Market Watch 68
Market Abuse Slipping Through the Net
Web-based trading platforms are used widely, particularly to administer rates and certain fixed income products. While these digital solutions can lead to faster execution times and support elaborate trading strategies, the FCA is concerned that they may not be capable of monitoring all orders to detect market abuse.
Through an ongoing review of digital trading platforms, the Regulator detected an uptick in the use of continuous, periodic and dark liquidity through web-based portals and pop-ups. This is of particular concern given that many users do not systematically record order messages that precede execution, or orders that do not ultimately result in a trade such as amendments and cancellations.
In plain terms, the rapid and ephemeral nature of web-based trading means that platforms may not be able to adequately capture all the information needed to monitor for market manipulation, thereby causing firms not to adequately perform the necessary market abuse surveillance. This is especially problematic in the case of dark pools – private exchanges that allow institutions to trade high volumes of securities away from the public eye. The FCA takes the view that this lack of transparency could degrade market integrity, and is intent on addressing these issues through policy in the months and years to come.
Compliance Challenges
In addition to issues arising from web-based trading platforms themselves, the FCA also identified institutional obstacles that could prevent market participants from properly complying with their monitoring and reporting obligations.
Firstly, the Regulator found that many web-based trading platforms do not consistently provide order data in sufficient quantities to enable compliant market surveillance to take place. This makes it difficult for analysts and others to recognise potential market manipulation. While some users are already using mechanisms to overcome these challenges, a significant gap in surveillance and reporting capabilities remains.
Beyond this, it was discovered that the compliance and surveillance teams of many market users and operators simply do not know the full extent of web-based platform use. Without a detailed understanding of activity levels, they are unable to allocate sufficient resources to surveillance and reporting functions, meaning that they cannot effectively monitor and mitigate market abuse risks.
Unjustifiable Failings
Despite the prevalence of these issues across all FCA regulated markets, it appears that many firms have adopted a questionable stance over their compliance obligations. The Regulator observed that a significant number of firms justify their failure to adhere to market abuse monitoring and reporting rules by referencing other firms in a similar position.
In response to these claims, the FCA reiterated that the failings of peers are not an acceptable justification for firms to neglect their own responsibilities. Firms that do not take their compliance obligations seriously face the very real risk of enforcement action and sanctions.
How to Stay Compliant
With all this pessimism surrounding the state of market surveillance, it important to focus practically on what your firm can do to ensure compliance. The following three points should be a priority for your firm:
- Ensure all levels of data are captured to make sure your firm has full oversight of trading activity. This is particularly important with regards to Order Data.
- Ensure that your existing surveillance procedures are up to date and compliant with the latest regulations to avoid further sanctions
- Enact appropriate governance and due diligence when onboarding new platforms to ensure all necessary data is captured to meet regulatory obligations
As firms increasingly turn to digital trading solutions and web-based platforms, many are failing to adequately adjust their approach to monitoring and reporting. In some cases, compliance teams lack awareness of digital trading activity by their firm whilst others struggle to obtain the data needed to facilitate effective monitoring.
While surveillance challenges are clearly prevalent in the UK trading environment, the FCA did recognise that some firms have deployed tactical solutions to help them comply with their obligations. As they continue to assess the suspicious transaction and order reporting (STOR) capabilities of market participants at all levels, it is becoming increasingly important for firms to ease their compliance burden with solutions like eflow’s TZ regulatory compliance and TZTR regulatory reporting platforms.
For more information on how eflow can help you fulfil your regulatory reporting needs, book a demo or contact eflow today.
*This article is provided for informational purposes only and should not be relied upon as legal or financial advice. Its contents are current at the date of publication and do not necessarily reflect the present state of the law.
