On 16 November 2021, The FCA released its latest newsletter on market conduct and transaction reporting issues, 'Market Watch 68'. The message from the regulator is clear, five years after the introduction of the Market Abuse Regulation (MAR) in 2016 and following on from its previous related publications on the topic, requirements for market abuse surveillance are not still not being met. This is very much perceived to be a growing area of risk.
Market Watch 68
This edition of Market Watch placed emphasis on trades executed on web-based/electronic platforms, users and operators of such. The FCA highlighted the following concerns:
Surveillance
The FCA reminds firms of their obligation under Article 16(2) of the UK MAR, 'to establish and maintain effective arrangements, systems and procedures for detecting and reporting potential market abuse behaviour'. Specifically, the FCA is concerned that web-based platforms may not have the capability of monitoring all of the orders, including unexecuted orders, to detect potential abusive behaviour.
Data challenges
The FCA highlighted that most users of web-based platforms noted that they face challenges in retrieving useable data for surveillance purposes, indicating significant gaps in surveillance.
Compliance awareness
The FCA has observed gaps and discrepancies in the knowledge of Compliance/Surveillance teams, including a lack of understanding of the web-based platforms utilised by firms, the levels of business undertaken via such, and the associated market abuse risks.
Market abuse risk assessments
Given the lack of awareness of such web-based platforms from front offices, the FCA is questioning whether risks related to web-based platforms are captured via firms’ market abuse risk assessments. The regulator states that despite most firms implementing market abuse risk assessments, such assessments often do not capture business and activity entered via web-based platforms.
Record keeping
The FCA highlighted that by not capturing all related trade and order data, firms are not only failing to comply with their requirement to detect and prevent abusive behaviour, but are also failing to meet the record-keeping requirements (data must be kept for a minimum of 5 years). As well as this, firms are failing to accurately respond to requests from the regulator for such related data, which it has the powers request at any given point.
Onboarding Governance
Firms often start using web-based trading platforms prior to the completion of their formal onboarding process. A lack of specific governance arrangements was also observed relating to the onboarding of these platforms. The FCA reminded firms that they must implement onboarding processes that consider how their obligations in relation to market abuse surveillance and record-keeping are met.
Next Steps
As with previous Market Watch publications, the FCA suggests that a firm’s failings cannot be excused because a peer firm is also failing to meet the respective requirements. Each case is assessed individually and firms should not be under the impression that enforcement actions won't follow, even if a peer firm with similar failings was not subject to any such action.
It is the expectation that operators of web-based platforms, monitor, prevent, identify and report potential abusive behaviour. They should also consider how they can help users to meet their own regulatory requirements and obligations, including the provision of accurate and usable data, both to their clients and the regulator.
We suggest relevant firms take action, if not already, to account for all of the above points as outlined by the FCA. In particular, firms must ensure that their market abuse risk assessments remain up-to-date at all times and are an accurate representation of firms’ activities, risks, systems, and controls. As the FCA has previously highlighted, risk assessments are the starting point of an effective market abuse framework for firms. In other words, a robust risk assessment should advise as to the level of monitoring required for a firm. Surveillance of transactions is of particular importance, and we remind firms that the FCA has the power to request specific information on trades executed by firms at any point, and in turn firms are expected to respond and provide details within a short time frame.
Accordingly, firms should not only ensure that they undertake proportionate monitoring of their activities and report any concerns to the FCA, but also they must ensure that their record-keeping practices are meeting the FCA’s rules.
Cosegic can help firms with a broad range of areas covered in this update. If you are a current client, please contact your consultant to open up a conversation about our support options. If you are not yet a client but would like to find out what we could do to support you, contact us to arrange an initial call.
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