When the EU’s Market Abuse Regulation (MAR) came into force in July 2016, it imposed new market surveillance and reporting requirements on firms and trading venues. The resulting Suspicious Transaction and Order Reports (STOR) regime requires that regulated entities detect and report any suspicious behavior or activity which is in scope of MAR, specifically market abuse and insider trading.
Over the past 12 months, there have been several signals from the UK’s Financial Conduct Authority (FCA) that the regulator will step up its activities around market surveillance and STOR reporting.
In its Annual Report for 2018/19, the FCA highlighted its use of STORs to actively monitor financial markets. The regulator reported having received a total of 5,604 STORs from the industry, which led to 484 preliminary market abuse reviews. It clearly wants more.
As Julia Hoggett, Director of Market Oversight at the FCA, pointed out during a recent speech on the topic of MAR, the regulator has actually seen a decrease in the number of STORs filed by certain firms. What’s more, the volume of STORs in the fixed income and commodity markets remains low. Hoggett believes this shows that firms with business lines in these asset classes have more work to do to detect and report suspicious activity – and she explicitly states that the FCA will focus its supervisory attention on these markets.
Similar concerns have been broached by the FCA previously. In its Market Watch 56 newsletter, for example, the regulator expressed concerns that STOR submission across asset classes is inconsistent, and that volumes are too low in fixed income products. What’s more, the regulator reported that firms are often over-prescriptive with analysts and do not encourage them to look beyond the initial alert. In fixed income markets this can lead to a too narrow analysis; reviewing only the activity in the product which triggered the alert and not considering other trading in correlated products.
As the FCA increases its focus on STOR, it also appears to be taking a closer look at the controls investment managers have put in place to achieve compliance with MAR. In August 2018, for example, the regulator issued a questionnaire to asset managers to gain insight into their market surveillance, risk management and reporting procedures around market abuse. More recently, in its Annual Report the FCA noted that it had found weaknesses in ‘the second line oversight of technology used for portfolio management and risk analysis’.
Taken together, all the signs point to likely thematic reviews by the regulator in the near future, possibly accompanied by headline-grabbing enforcement action to press the point home. In the light of this, firms should act fast to review the quality of the market surveillance controls they have in place. In order to meet the FCA’s expectations, firms need to put in place an automated market surveillance capability that can be calibrated to the detection thresholds of individual models to reflect the characteristics of different asset and instrument types, or their own trading strategies, business units or regional variations.
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