Developments from this week indicate that regulators are ramping up efforts to prevent and penalize market abuse violations.
In the UK, the Financial Conduct Authority (FCA) has issued Market Watch 79, which highlights common market abuse surveillance and data governance failures, providing examples and outlining steps that firms can take to enhance their surveillance practices. Meanwhile, in Australia, the Securities and Investments Commission (ASIC) has imposed a substantial penalty on the securities arm of a multinational financial services company for allowing suspicious client orders on the futures market.
Combined with recent trade surveillance penalties imposed in the US by the CFTC, OCC, Federal Reserve, and FINRA, this indicates a significant shift in regulatory focus toward stronger trade surveillance enforcement globally, with penalties exceeding $349M.
FCA Market Watch 79 on Market Abuse Surveillance and Data Governance Failures
This week, the FCA released Market Watch 79, highlighting the critical need for robust market abuse surveillance. The update from the UK regulator underlines how lapses in data governance and alert systems can undermine compliance with the Market Abuse Regulation (MAR). Crucially, the newsletter encourages firms to review their surveillance models in light of these findings to ensure regulatory compliance and effective risk management.
Here’s a summary of Market Watch 79:
Market Watch 79 highlights that despite past advice, challenges persist with market abuse surveillance, often due to faulty implementation, technical bugs, and incomplete data ingestion. These issues can lead to ineffective monitoring, partial alert generation, or even complete failure to detect certain types of market abuse.
The newsletter provides three examples of firms that have fallen short of their MAR obligations:
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Firm A: Failed to activate a critical news feed in its insider trading detection system, leading to undetected suspicious trading for over three years. The error only came to light following an FCA inquiry.
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Firm B: Due to faulty alert logic in an in-house surveillance system, potential insider trading in corporate bonds went undetected for years. The system was mistakenly considered effective due to generating alerts and resulting in Suspicious Transaction and Order Reports (STORs).
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Firm C: An ingestion gap in a third-party system resulted in years of unmonitored trading activity related to a particular venue. Alerts generated from other trading activities falsely reassured the firm that its surveillance system was fully operational.
The newsletter also highlights the steps firms can take to prevent similar failures, including:
Data Governance:
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Ensure all relevant trading data is accurately captured and monitored.
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Clearly define data ownership and management responsibilities.
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Regularly check data quality and prioritize remediation based on risk.
Model Testing:
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Formalize and strengthen governance arrangements around testing.
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Involve calibration, logic, coding, and data in model testing.
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Adopt a risk-based approach to testing frequency and depth.
Model Implementation and Amendment:
ASIC Imposes Penalty on Securities Arm of Multinational Financial Services Company for Market Manipulation Failures
ASIC’s Markets Disciplinary Panel (MDP) has imposed a $775,000 penalty on the securities arm of a multinational financial services company for allowing suspicious client orders to be placed on the futures market, ASX 24.
The MDP's investigation found that 36 orders placed by a client between January 11, 2022, and March 3, 2022, appeared to have been intended to create a false or misleading appearance in the market for Eastern Australia Wheat futures January 2023 (WMF3) contracts.
ASIC Deputy Chair, Sarah Court, highlighted the importance of preventing market manipulation, especially in energy and commodity derivatives markets. She emphasized that farmers rely on these contracts to manage wheat price fluctuations that impact consumer prices.
The MDP's infringement notice emphasized that all market users must proactively identify potential rule breaches to maintain market integrity and stressed the significance of prompt communication between regulators, market participants, and clients.
The orders in question displayed patterns indicative of potential market manipulation, with characteristics such as being placed late in the trading session, having small volumes, affecting the daily settlement price of WMF3 contracts, and being atypical for this product. The MDP found the company negligent for failing to recognize the suspicious activity, and for not acting promptly when alerted by ASIC.
The company cooperated with the investigation, did not contest the findings, and has paid the penalty. Compliance with the infringement notice is not an admission of guilt or liability.
HOW STEELEYE CAN HELP
SteelEye is the pioneering provider of integrated surveillance solutions.
SteelEye’s Trade Surveillance Solution enables firms to effectively monitor their trading operations for any behavior indicative of market abuse. It covers a wide range of risk indicators, including spoofing.
More importantly, SteelEye's data controls and governance framework is designed to ensure the integrity and completeness of data ingestion and processing. Our sophisticated monitoring systems continuously track the flow of data, alerting users promptly if any discrepancies or interruptions occur.
Book a demo with SteelEye to see firsthand how our data-driven surveillance solutions make your compliance practices more robust and effective.
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