Market Watch 68

United Kingdom | 出版物 | 十二月 2021

Introduction

On 16 November 2021, the FCA published its latest newsletter regarding market conduct and transaction reporting issues, titled Market Watch 68 (Market Watch 68)

This Market Watch discusses web-based trading platforms which are widely used for rates and fixed income products. The key points arising from Market Watch 68 are as follows:

firms’ surveillance arrangements need to encompass web-based platforms, but collecting data in a format that can be used for the purposes of surveillance brings its own challenges;
firms have often omitted orders from the scope of their surveillance and as such are potentially missing key data for surveillance purposes;
firms who have risk assessments in place are better able to address the risks the firm faces from market abuse, and therefore deploy surveillance arrangements more effectively;
firms who have appropriate onboarding in place for web-based platforms identify risks posed by those platforms in a more complete manner and are therefore able to make their surveillance arrangements more effective; and
record keeping and the capture of data is essential for both compliance with the UK Market Abuse Regulation (UK MAR) and UK Markets in Financial Instruments Regulation (UK MiFIR).

Although these points are focused at those using and operating web-based platforms, the lessons from Market Watch 68 are relevant for many firms, particularly as the FCA has indicated it is concerned that the requirements of the UK MAR are still not being met.

Previous observations

In its previous issues of the Market Watch newsletter, the FCA have shared observations from supervisory visits. These observations have historically related to compliance with the Market Abuse Regulation (MAR), and now UK MAR in relation to trade surveillance, risk assessments and record keeping. This has included the following:

the FCA identified that firms may wish to undertake a detailed assessment of market abuse risks to which they are exposed before designing a surveillance programme. The FCA identified that this risk assessment could be undertaken in a number of ways, but that utilising the experience and knowledge of front office staff in the design of the risk assessment could be beneficial;
the FCA identified that firms utilising “off-the-shelf” surveillance technology may not be appropriately calibrating it to capture all relevant trading activity so it may not be appropriately tailored to capture relevant alerts;
firms have under-invested in the training provided to their front office staff, leading to a low level of understanding and commensurately low reporting of potential incidents;
that treating the list of indicators within MAR as exhaustive in identifying the market abuse risks posed to the firm is insufficient, and firms should be considering broader points than this in accordance with their business model;
suspicious transaction order report (STOR) submissions across asset classes remain inconsistent and submissions are too low in fixed income products. This may be because of over-prescriptive approaches with analysts who look at the alert too narrowly and do not consider other products that may be impacted, or consider trading activity in other products; and
firms have used questionable rationales to reconcile themselves to their potential failure to meet their obligations under MAR. In particular the FCA has identified two themes in the reasons that firms provide for their failures which are that (1) firms across the industry have similar failings; and (2) the senior management function (SMF) 16 has only recently joined and therefore the individual is not responsible for the predecessor’s arrangements.

The findings from Market Watch 68

As outlined above the FCA has picked up on specific themes in historic newsletters and publications, but this is the first time these themes have been addressed in one document, and in some cases the FCA has become more emphatic in its expectations. Although focused on the requirements in respect of web-based platforms, Market Watch 68 is useful for informing firms more generally in respect of the expectations around surveillance, risk assessments and awareness within firms.

Surveillance requirements

The FCA’s specific concern in respect of web-based platforms is that the surveillance systems put in place in order to comply with Article 16(2) of UK MAR do not capture all orders to detect potential market abuse. The FCA’s view is that orders are a critical component for monitoring and therefore the capturing of unexecuted orders is essential to having robust monitoring systems.

It should be noted that the requirement in Article 16(2) is for individuals to maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions (emphasis added). As such, by failing to identify orders on such platforms firms are running a significant regulatory risk that their surveillance arrangements fail to meet the requirements in UK MAR. In particular, by not having surveillance arrangements that detect such orders, there is a risk that a firm will not be able to make STORs, resulting in a failure to comply with Article 16. Furthermore, the detailed standards set out in Commission Delegated Regulation (EU) 2016/957 (as on-shored in the UK) (the Technical Standards) in relation to the arrangements that Article 16 mandates requires that the system covers the full range of trading activities undertaken.

This is something that all firms should consider, and specifically whether the existing surveillance system is broad enough to encompass all orders being received in all instruments the firm is trading.

Surveillance and data challenges

Surveillance without the correct data can be challenging, and the FCA in its observations also identified a common theme that firms are struggling to obtain data in a format that is suitable for surveillance. Although some users have employed tactical solutions, the gap still exists.

For the FCA, this also raises questions in respect of compliance with the requirements in Article 16 of MAR. Specifically, if there is data missing or not in a format that can be used for surveillance then there is a question as to whether such arrangements are effective. This assertion that the arrangements are not effective would be supported by the detailed requirements in the Technical Standards that require the arrangements to allow for analysis of every transaction executed and order placed.

This is something all firms might need to consider, and specifically whether data ingested into surveillance systems allows for appropriate analysis and review of all trading and order activity.

Compliance awareness

The FCA also found that the team responsible for surveillance have varying levels of knowledge about the use of the web-based platforms within the firm. In particular, surveillance teams are unaware of which platforms are used and the volume of business being conducted on the platform, resulting in the team responsible for surveillance having an incomplete picture of the risks that the firm is facing in respect of market abuse.

Without a complete understanding of the profile, the concern would be that it is not possible for the firm (and those responsible within the firm) to implement arrangements that are appropriate, with a surveillance system that has sufficient scope to monitor all relevant activities.

Risk assessment

The FCA has highlighted that many firms utilise risk assessments to assure themselves that they have identified, assessed and therefore can manage all market abuse risks facing the business. In previous issues of Market Watch the FCA discussed how these might be best conducted, but specifically in Market Watch 68 the FCA identifies that firms are not including web-based platforms within the risk assessments of the firm.

In the event that a firm omits business from its market abuse risk assessment, there may be questions in respect of whether the surveillance arrangements in place are sufficient. In particular, without understanding the volume and scope of the transactions, it is difficult for firms to argue their arrangements remain effective and are able to identify all suspicious transactions and orders. Firms have effectively fallen at the first hurdle and these shortcomings may undermine good monitoring efforts in other areas.

Firms should keep this in mind when considering their own arrangements, and specifically whether the risk assessment it has implemented is broad enough to cover the activities of the firm, and therefore for the firm to be able to deploy its surveillance arrangements in a manner that best addresses the risks that the firm faces.

Onboarding governance

In terms of onboarding governance the FCA reports that it has seen firms using web-based trading platforms before completing formal new business procedures. The regulator has also seen instances where there is a lack of specific governance for onboarding these platforms. Where firms have a process for onboarding new platforms, the FCA found that those firms were better able to capture and monitor all relevant trade and order data. As such, it is likely that these firms are better able to use data for the purposes of surveillance and meet their requirements under UK MAR.

Where there are issues in onboarding platforms, and in particular a failure to account for new platforms or products, this can result in a failure to account for all activities within the market abuse risk assessment. In such cases, the firm faces issues in making sure that it is addressing all risks, and that its procedures and surveillance are appropriately tailored to these risks.

The general lesson for firms is that new product approval processes should encompass consideration of the market abuse risks that the firm faces as a result of new products or new methods of trading including new strategies and platforms.

Record Keeping

The FCA has highlighted as part of Market Watch 68 that a failure to keep records in respect of all orders and transactions means that there is also a potential breach of UK MiFIR. The basic requirement from UK MiFIR is to keep details of all orders and transactions for five years. For those transacting using algorithms the requirement to keep these orders in a specific format also exists, and firms have to consider how to keep details of all orders, as well as making sure that all orders are retained in the appropriate format.

There is significant practical difficulty in capturing all orders, particularly where orders are able to be placed via multiple means, and when an order comes into existence may not always be clear. The important takeaway for firms is to have a clear idea of how orders are transmitted and ensure that technology solutions for monitoring are effectively deployed.

Next steps for firms

Firms need to consider the FCA’s comments in Market Watch 68 and ensure that they monitor all orders and transactions.

Practically for firms this may include steps such as:

considering the scope of their risk assessment;
considering whether market abuse risk is identified as part of any new product or new strategy approval;
identifying whether the surveillance arrangements in place are sufficiently broad to capture all trading activity, including orders; and
making sure that record keeping systems and controls capture all relevant data and such records are retained for a minimum of period of five years.