Despite recently shelving its plans for a thematic review into the relationship between banking culture and market abuse – a decision that surprised many people in the market - the whole area of culture
and accepted practices within the banking sector is still a key area of focus and concern for the FCA (Financial Conduct Authority). Its
2015-2016 business plan stated that “Poor culture and control continues to threaten market integrity”. And its two most recent MarketWatch reports (48 &
49) make numerous references to how poor culture within firms can lead to greater risk of market abuse.
It’s not just the FCA. In its recent
Report on stocktaking and challenges of the EU Financial Services Regulation, the European Parliament stressed that efforts towards a cultural change in the financial sector had to be pursued further and called on all actors in the financial sector “to
work towards a cultural change and a culture of compliance within their organisations that puts the interest of customers first”.
Any positive, top down, cultural change within an organization – never mind a whole industry sector - takes time to achieve. But what happens in the meantime in the fight against market abuse, particularly with the Market Abuse Directive & Regulation (MAD
II/MAR) due to come into force later this year? What practical steps should firms be taking?
A good starting point is the series of articles my colleague Theo Hildyard wrote early in 2015 on the Seven Pillars of Market Surveillance, which identified that in order to anticipate and prevent anomalous behaviours - before they impact the market - firms
should be able to:
1. Converge siloed systems such as anti-money laundering, operational risk and trader profiling into a single monitoring system for a correlated view of potential threats.
2. Perform “continuous analytics” using real-time information and historical data to help predict that something might be about to happen – and prevent it.
3. Include data from social media, email and chat rooms to alert management to anomalous human behaviour.
4. Monitor across asset classes to prevent rogue algorithms from running amok in more than one market.
5. Monitor cross-region to assure adherence to different regulatory environments.
6. Monitor for “unknown unknowns,” by benchmarking behaviour that is “normal” over time and spotting behaviour that deviates from the norm.
7. Turn a new unknown behaviour into a known behaviour by dynamically adding new rules to the system.
Unfortunately however, according to the aforementioned FCA MarketWatch documents, it seems that many firms still struggle to address even one of these seven pillars, never mind all of them. Recently, when conducting its Suspicious Transaction Reporting (STR)
Supervisory Visits and its Commodities Trading Thematic Review, the FCA found many instances where:
- STR was inconsistent and of low quality.
- Firms could not demonstrate adequate monitoring and surveillance.
- There were concerns around the integrity and completeness of the data being used.
- Beyond equity products, even basic surveillance had not been undertaken and incidents were being missed.
- Firms relied too heavily on ‘out of the box’ alert calibration and did not set clear parameters for surveillance.
- There was little order level monitoring, making it difficult for firms to demonstrate effective monitoring for market manipulation.
There is no excuse for the above failures. And there is of course no magic wand that will instil an immediate change in culture to address the problems that the FCA uncovered. But the firms who are unable – or unwilling – to address these issues today, stand
little chance of upholding their responsibilities when MAD II & MAR come into force. These new regulations will be much wider than those that currently exist, covering additional venues (Multilateral and Organised Trading Facilities – MTFs & OTFs); wider definitions
of insider trading to included cancellations and amendments to orders; changes to suspicious transaction reporting to include orders; new rules around market soundings; and new cross-market manipulation rules, particularly relevant to any firms who are still
trying to take a silo’ed approach to market surveillance.
Fortunately firms can significantly reduce their exposure to market abuse by implementing surveillance solutions that not only identify and report on suspicious behaviour before any damage is done, but do it across asset classes, across locations, in real
time. And if those solutions are designed with flexibility and adaptability in mind, firms will benefit by not only being able to handle changing regulations and new markets, but also to address all seven pillars of market surveillance, now and in the future.