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EU cracks down on market abuse while US leaves the door open

Earlier this month the Financial Times reported that UK market regulators fined a commodities broker for “market abuse” for the first time—a sign that the Financial Services Authority is cracking down on price manipulation. (

In the US, the banking industry has been captivated by last month’s prosecution of Raj Rajaratnam of Galleon Group for insider trading.

The sheriff’s back in town. Light-touch regulation is dead.

Or is it? Reading the details of the Rajaratnam case it was interesting to see that key evidence surrounded recorded calls between him and a cohort at Goldman Sachs. It was lucky that Goldman Sachs had made and kept the recordings, because under US market regulation they didn’t need to.

Currently, the Securities and Exchange Commission (SEC) requires most forms of communications to be recorded, including email, instant messaging and text. All except voice. By failing to plug this gap, they are making their job harder.

Things are different in the EU. Under the Markets in Financial Instruments and Market Abuse Directives (MiFID and MAD), it has been clear in addressing this, and the reasons for doing so. Early adopters such as Norway and the UK lead the way. As the UK’s Financial Services Authority wrote back in March 2008:

“Preventing, detecting and deterring market abuse is one of our key priorities. However, market abuse is one of the most difficult offences to investigate and prosecute. Good quality recordings of voice conversations and of electronic communications help firms and us detect and deter inappropriate behavior.”

Like Europe, many established US financial institutions have had in place some kind of fixed-line voice recording for service quality, dispute resolution and their own internal governance. But this is not the norm. The smaller the firm the less likely this is to be the case. 

It’s not just that firms don’t record. They are being actively dissuaded from doing so by, in the words of one chief operating officer I met recently, “increasingly oppressive regulators”.

The problem can be summarized in two words: discoverable evidence. Closer scrutiny of regulators has increased the perceived risks of retaining information unless the regulator requires it. The result is that recorders are being disabled.  

With 18 months before the US elections, expect to see a flurry of wider and tighter banking laws. If the President wants to show he is no soft touch when it comes to dealing with market abuse, his regulators should take a leaf out of their cousins across the water.



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