Market Watch 73

The Financial Conduct Authority (FCA) has published a new edition of its Market Watch (No. 73). This latest version primarily deals with the findings from the FCA’s recent peer review of firms „that offer Contracts for Difference (CFDs) and spread bets (CFD providers)“ in relation to (potential) market abuse and market abuse mitigation. As CFD trading and spread bets are prone for potential market abuse, the FCA focused its review on the following key issues:
– Understanding and identification of a firm’s market abuse risks
– Market abuse surveillance and escalation in case of alerts
– Alert investigations
– Cooperation and communication with front office staff
– Follow-up actions
##### The key findings along with the expectations of the FCA are briefly outlined below.
(1) Understanding and identification of a firm’s market abuse risks: Far and foremost, so the FCA, must firms be aware of the potential risks they themselves pose to market abuse. This particularly holds true for insider trading as regards equity spreads, but is equivalently high for other types of securities as well. What the FCA found is that the risks were often assessed for one particular asset class; others were neglected. Additionally, some firms did not assess their OWN risks, but performed general insider trading risk assessments. Furthermore – and this is what the FCA particularly warns off: market abuse may occur not only by insiders, but via client orders as well. Particular attention should be paid to clients with direct market access and to potential indirect manipulation, e.g. by using third parties to manipulate prices in the CFD „underlying“.
(2) Market abuse surveillance and escalation in case of alerts: As the FCA expects, most firms had in place policies and procedures to monitor market abuse and to handle alerts when they arise. The FCA was also highly satisfied with firms‘ assignment of tasks in this context and the delegation of responsibilities. Particularly small firms whose monitoring and alert handling functions rest outside of their compliance units should be aware of possible conflicts of interest.
(3) Alert investigations: When investigating market abuse alerts, the FCA expects firms to consider a number of factors including a client’s trading history or past investigations. Firms should use all information they can obtain, before deriving a decision as to further measures. Some firms, so the Authority, did not consider such history or neglected to take into consideration past incidents. Others, on the other hand, even used IP addresses of clients to match them with previous incidents. In either case, should firms have clear policies in place that set out the factors of consideration. Additionally, firms should keep record of any decisions made and the factors that were considered in this decision making process.
(4) Cooperation and communication with front office staff: As the front office (dealing desk) is most likely to be associated with insider dealing or trading, many firms‘ compliance departments seem to be reluctant to get in touch with the front office on suspected matters. Furthermore, the FCA found that an unwillingness or fear of tipping-off clients or staff members prevented adequate communication between the two units. Other firms‘ compliance units and front offices, however, shared ALL information, including information on all „Suspicious Transaction and Order Reports (STORs) that have been filed. As far as the expectations of the FCA are concerned, the regulator urges firms to find a right balance between too little and too much sharing. The sharing of all filed STORs is not in the interest of preventing market abuse. Likewise, no STOR should ever be communicated to clients.
(5) Follow-up actions: To the FCA’s delight, all reviewed firms had policies in place to determine follow-up actions on alerts. Some firms thereby decided on a case-by-case basis, while others had set out clear measures that follow subsequent to a single or multiple alerts. There’s no one-size-fits-all solution for all firms, so the FCA, and firms are encouraged to pursuit those solutions that best suits their business model, size, and risk appetite.
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As the above summary only covers the key issues identified during the review, please refer to the original Market Watch for more detailed, comprehensive information.