History has shown that it can take a while for regulators to enforce market abuse rules. Even when a new law is passed, regulators take time to test their powers and understand their reach before enforcement begins in earnest.
For instance, insider dealing became a criminal act in the UK in 1980. However, prosecutions against individuals only stepped up once the Financial Services & Markets Act of 2000 (FSMA) strengthened the authority of the FSA and made market abuse a civil offence.
Over time, penalties became more severe, and the pace of change slowly picked up. There were a growing number of high profile cases, such as those involving fines for Greenlight Capital and the “Hound of Hounslow”, but it wasn’t until 2013 that we saw the first enforcement action against an individual for complex market abuse with the Coscia layering/spoofing case.
Something similar is now happening in Asia, but on a much-reduced timeframe. Most important Asian financial centers have prohibitions for insider dealing and market manipulation in their financial legislation. However, levels of enforcement have generally been considered to be too weak to be effective.
This is now changing – and fast. As recently as March 2015 the Monetary Authority of Singapore (MAS) announced a new market misconduct enforcement regime as part of the Securities and Futures Act. The following year saw the MAS conduct its first prosecution for layering and spoofing in a case involving fictitious orders for contracts of difference, which resulted in an individual trader at a regulated firm going to prison. Similarly, in 2019 the MAS prosecuted and jailed two futures traders for entering fictitious orders for the SGX MSCI Singapore Index.
Considering the time it took more established regulators like the FCA to take action for similar activity, this can be considered a rapid advance in regulatory enforcement powers as well as an indication of future intent.
In Hong Kong, insider trading only became illegal in 2003 and it took five years before the Hong Kong Securities and Futures Commission (SFC) secured its first criminal conviction. Despite once being behind the curve, the SFC has ramped up the level of fines in recent years, increasing these from $93 million in 2016 to $940 million in 2019. This included a high profile fine of $4.5 million for a firm of brokers for failing to have adequate internal controls to prevent market disruption arising from its execution of orders.
In China, enforcement has also increased. The China Securities Regulatory Commission (CSRC) investigated 334 cases in 2015, a 54 % increase on the previous year.
In the first half of 2016, CSRC investigations into market manipulation rose by 68% for the same period in the previous year. The trend has increased with the first quarter of 2020 resulting in the CSRC issuing a total of 19 penalties (a 35% increase for the same period in 2019), involving cases of insider trading and market manipulation.
In 2020 the People’s Bank of China imposed the first-ever fines above 10 million yuan ($1.4 million) to three investment firms and topped that with a high profile fine for 2.72 billion yuan ($380 million) for two individuals involved in insider trading.
Simon Green, Head of Compliance at RIMES, comments: “We can conclude from all this activity that regulators in Asia are ratcheting up enforcement around insider dealing and market manipulation.
“One area of concern is that, in the absence of an equivalent to the overarching EU Market Abuse Regulation, which expanded the application of market abuse rules to all types of investment firms, firms in the region may mistakenly think they’re outside the remit of local market abuse laws. These firms may find themselves unprepared when regulators enquire about their market abuse controls – something that seems likely to occur sooner rather than later.
“This could be a good time for Asian investment firms to consider whether their trade supervision arrangements are sufficient to deal with a rapidly changing regulatory environment.”
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