Market Watch 69 – A focus on Market Abuse Monitoring For Small and Medium Sized Firms
May 24, 2022 by Clare Curtis
On the 17th May 2022, the FCA published the 69th edition of their Market Watch newsletter. The emphasis this time being on market conduct and transaction reporting issues, with a particular focus on small and medium sized firms. The topics covered are applicable to all firms subject to the surveillance requirements under Article 16 (2) of UK MAR, but are particularly relevant for firms with less complex business models. The newsletter is broken down into 7 sub-sections setting out what the FCA would expect to see from small and medium size firms in relation to their market abuse monitoring and transaction reporting.
Risk Assessment
A risk assessment forms the basis of any compliance monitoring program, it is therefore essential that all firms have in place a comprehensive accurate and up to date risk assessment in relation to market abuse. Risk assessments should take into consideration the different types of market abuse risks and how prevalent they might be across the firm’s different areas of business and asset classes. Whilst there are many different ways a firm can assess and monitor for their market abuse risk, the FCA highlighted that firms that do not consider different types of market abuse, the different areas of business in which they operate, how that business is undertaken and the different asset classes and instruments traded, may not be able to adequately identify market abuse risks and align their monitoring program to ensure effective surveillance. Likewise, firms who do not review and update their systems and assessments as periodically are also at risk of failing to adequately identify emerging risks and align their monitoring and surveillance effectively.
Order and Trade Surveillance
A strong surveillance program considers the different characteristic of different asset classes and instruments before calibrating alert scenarios to effectively monitor and identify potentially suspicious activity. Firms that use common thresholds in its alert scenarios for all asset classes and instruments are more likely to struggle to ensure effective monitoring. It is also essential that firms consider all trade cancellations and amendments in their surveillance and not just executed trades, cancellations and amendments can themselves be an indicator of unusual activity. In order to achieve the most effective surveillance program it is essential that firms not only have a surveillance solution in place, but that they understand it. This is a particular challenge when it comes to the use of third-party vendor solutions, firms need to make arrangements to ensure that they understand how alert scenarios work in order for them to identify any gaps or weaknesses in their surveillance. Likewise, in order to achieve an effective surveillance program, firms need to ensure that the arrangements that are in place including parameters on logic, and the work undertaken on analysis and escalation are periodically reviewed and updated.
Policies and Procedures
Whilst it is known that there is an expectation for firms to have policies and procedures in place in relation to Market Abuse, it is essential these documents are clear, detailed and up-to-date. Policies and procedures should be a tool used by firms to ensure regulatory compliance, it is therefore essential that documents do not just set out indicators for market abuse, but that they also offer guidance on why they are deemed potential indicators of market abuse and what other factors should be considered. Firms need to ensure that their policies and procedures achieve the right balance between not being over-prescriptive, allowing and encouraging initiative whilst ensuring consistency.
Outsourcing
Where firms have decided to outsource their surveillance to either another part of the organisation, or even a third-party organisation it is essential that there remains sufficient oversight in place. Whilst there are often benefits of outsourcing the surveillance program, there are often challenges presented in the oversight which can take place. Firms must ensure that surveillance is adequate for UK requirements and that there remains adequate knowledge of alert logic and calibration and quality assurance on triggering alerts and the investigation and escalation process. It is also essential that detailed Management Information is produced periodically in order to aid Senior Management discharge their oversight responsibilities.
Front Office
It is essential that firms clearly define the expectations of the first line of defence versus the second and third lines of defence. Firms should not place sole reliance on front office staff for identifying potential market abuse and their responsibilities should not be a mitigant for a non-existent surveillance program within the second line. An effective monitoring and surveillance program will have clearly defined responsibilities which ensures an effective monitoring and surveillance program whilst avoiding any potential conflicts of interest. Firms should ensure that tailored training is delivered to the front office to help them better understand market abuse and their role in escalating potential suspicious activity.
SYSC 6.1.1R
In 2018 the FCA published a Financial Crime guide, which requires firms to consider market abuse risks alongside their Financial Crime program. In Market Watch 69 the FCA reminded firms of the expectation that they should have a formalised framework in place in response to this guidance, which should form party of the market abuse monitoring and surveillance program. Firms should also ensure that any market abuse training that is delivered covers obligations and expectations under SYSC 6.1.1.R.
Market Abuse by Firms Employees
Firms who suspect their employees of potential market abuse should submit a STOR without delay, once they have reasonable concern or suspicion that market abuse has taken place. Firms also need to ensure that they give careful consideration to any disciplinary measures they take in relation to their concerns once a STOR has been submitted of a decision to submit one has been made.
How Can Effecta Help?
- Independent Reviews: For those firms which already have a market abuse risk assessment and monitoring and surveillance program in place, Effecta can conduct independent reviews and audits of your control frameworks and policies and procedures to ensure they are adequate to meet your regulatory responsibilities.
- Risk Assessments: For those firms who do not have an up-to-date market abuse risk assessment in place, Effecta can work with you to identify the potential market abuse risks that are inherent in your business.
- Monitoring and Surveillance: For those firms who not have, or have not recently reviewed the monitoring and surveillance program, Effecta can work with you to implement a program that looks for suspicious activity across different business lines and asset classes.
- Training: Effecta can assist you with designing and implementing a tailored training program that sets out the market abuse risks your firm may face, along with the individual responsibilities and expectations of the first and second line of defence.
- Advice: Effecta can provide ad hoc compliance support and guidance on market abuse monitoring and transaction reporting.