In Market Watch 50 the FCA highlighted its increased focus on firms’ systems and controls to prevent market abuse. Our blog entry is here.
The FCA has now published Market Watch 51 in which it reports on a recent review of the market abuse systems and controls currently employed at several firms that engage in market making activities. The review focussed on four key areas:
- market abuse risk awareness. The FCA notes that regular risk assessments are clearly important in mitigating the risks of market abuse. Some firms in its review conducted detailed assessments of market abuse risks that included a comprehensive list of the relevant risks and the key responsibilities for managing and mitigating these risks, including the controls employed to achieve these goals. In particular the FCA mentions that firms who were not conducting regular market risk assessments had difficulty in demonstrating that effective controls were in place;
- information barriers. One of the points the FCA notes is that in order for information barriers to operate effectively they need to be clearly defined and understood. In its review, the FCA found that firms that physically segregated individuals or teams that regularly have access to confidential or inside information were able to demonstrate more effective controls. However, where this was not possible firms should consider taking extra steps to ensure the information barriers are properly managed and maintained. The FCA notes that the Fair and Effective Markets Review mentioned that this could include specific training for staff operating in these areas and ensuring compliance representatives are properly integrated with front line operations to improve manual surveillance capabilities and information management;
- wall-crossing procedures and insider lists. The FCA notes in particular that the level of documented wall-crossing procedures was generally poor across the firms it reviewed. The FCA draws firms’ attention to Article 11 of the Market Abuse Regulation which includes procedural and record-keeping provisions in relation to both wall-crossed and non-wall-crossed market soundings; and
- on-going monitoring and surveillance. The FCA states that it observed some examples during its review where firms periodically monitor the trading activity of market makers during periods when individuals at the firm had been wall-crossed. The FCA considers this type of extra due diligence as an important step in mitigating the risks of market abuse and encourages all firms to consider performing this type of enhanced monitoring.
Market Watch 51 also provides an update on payment for order flow following the FCA’s guidance on the practice in 2012 and its thematic review in 2014. The purpose of the FCA’s update is to:
- share the outcomes of its follow-up supervisory work following its thematic review in 2014;
- reiterate its rules and clarify the regulatory obligations in relation to one area of residual non-compliance, namely conflicts management practices of firms in their dealings with eligible counterparty clients (ECP); and
- signpost forthcoming regulatory changes under MIFID II to the best execution, inducements and conflicts of interest rules, with the latter further strengthening the framework for ECP business.
View Market Watch issue 51, 27 September 2016