This week, the FCA issued clear guidance about the standards of behavior it expects from firms while financial markets are dealing with the impact of COVID-19. These guidelines could be taken to indicate that the regulator has seen something it doesn’t like and is gearing up to take action – rather like a soccer referee having a quiet word with an offending player as a last warning before issuing a card.
The informal guidance is set out the FCA’s Market Watch publication, issue No 63, published on May 27 – “Market conduct and discipline in the context of coronavirus”. The guidance reminds firms to maintain robust market surveillance “in the context of changes in market conditions and alternative working arrangements”, and adds that “we will continue to use our range of powers to monitor, make enquiries, investigate, and if necessary, take enforcement action…”.
These words can be taken as a timely reminder for firms to ensure that they have reviewed their monitoring and control arrangements. Those that have done so may feel confident of meeting FCA expectations. However, many firms may have come to realize that their existing surveillance tools are not sufficient to provide the oversight required, particularly when it comes to monitoring communications involving insiders (especially those following wall crossings). And let’s not forget that even before the crisis some market participants were already behind the curve in terms of their surveillance arrangements.
The FCA notes that firms’ surveillance systems should be “adequately and appropriately calibrated” for new or heightened risks arising from the pandemic in relation to the misuse of inside information and the manipulation of markets. Those with responsibility for surveillance arrangements within regulated firms under the Senior Managers & Certification Regime will no doubt be conducting risk assessments to determine whether there’s a chance of disciplinary action – rather like the football manager who sees their player being warned by the ref.
A risk assessment at this time should include checking whether a firm is able to recalibrate its surveillance systems to ensure thresholds are still appropriate for market conditions; that its surveillance teams can identify genuine concerns from a higher than normal volume of alerts and market activity; that its surveillance system has the ability to pinpoint suspicious behavior accurately; and that its system can access related communications associated with unusual or suspicious activity, as well as identify all the relevant trade and order activity for the instruments in which the firm trades.
More specifically, the FCA noted concerns about “opportunistic strategies” involving credit events and credit default swap activity, and also expressed worries around PA dealings. Firms should ensure that controls for both of these areas are reviewed.
Simon Green, Head of Compliance at RIMES, explains further: “The FCA has stated that it will continue to request information and make enquiries during this period. Such requests typically require firms to provide information within a narrow timeframe, which can be a challenge for firms without adequate surveillance systems. Yet, it’s vital that firms are able to meet this obligation as failure to respond within deadlines is often taken by the regulator as an indication that there’s a weakness in the firm’s controls.
“It is also significant that the FCA refers in its guidance to ESMA’s MAR Q&A, response 6.1, which clarifies that MAR applies to the activities of buy-side firms ‘such as investment management firms (AIFs and UCITS managers), as well as firms professionally engaged in trading on own account (proprietary traders)’.
“Given that MAR has been in force for nearly four years the fact that the application of its requirements to buy-side firms has been reiterated is a big hint that there are perceived weaknesses in the surveillance arrangements for this sector. This should be taken as a clear warning for buy-side companies in particular to review their systems.
“The FCA concluded its guidance by stating that it will use its enforcement powers where it identifies potentially abusive activity or where there’s a danger of a disorderly market being created. If you have a concern that your surveillance arrangements may not pass muster when under regulatory scrutiny or simply wish to see what an integrated surveillance and communications surveillance system that addresses regulatory concerns can offer, contact RIMES for a demonstration”.
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