Using automated voice surveillance systems and surveillance techniques involving Natural Language Processing are among the emerging practices being used to combat the risk of insider dealing and market manipulation, according to new guidelines from the FICC Markets Standards Board (“FMSB”).
The practices are highlighted in a new FMSB paper or “Statement of Good Practice” on surveillance, which sets out the Core Principles that firms should consider and also identifies current good practice for surveillance in the foreign exchange markets.
In a separate Statement of Good Practice on conduct training in wholesale fixed income markets, the FMSB recommends that senior front office managers should play a bigger role in conduct training, making time for face-to-face discussion of conduct issues with staff.
Mark Yallop, Chair of the FMSB, said: “More effective surveillance systems and better conduct training are two areas the industry needs to work on to improve conduct in wholesale fixed income markets. These statements of good practice share good or best practice in the industry but more importantly, they allow firms to measure themselves against their peers.”
Among the Core Principles for surveillance practice that the FMSB recommends firms consider are: ensuring the surveillance function is independent of the front office; that there is effective governance and controls; and that surveillance systems are reviewed regularly to make sure they are fit for purpose as risks change.
Mark Yallop added: “Firms need to keep their surveillance practices constantly under review. This is a fast-developing area and technology is having a profound impact on industry practice.”
The need for better surveillance to address market manipulation was identified by the Fair and Effective Markets Review (FEMR) which said in June 2015 that “substantial further development of firms’ misconduct surveillance is required to deliver fully effective oversight of FICC markets.”
Another area highlighted by the FEMR was training. The focus of the FMSB Statement of Good Practice is on conduct training rather than technical competence and key elements identified by the FMSB are: the need for clear structures and lines of responsibility for delivering training; training tailored to individuals’ role and experience; and more face-to-face training from senior front line managers who understand the business best.
The FMSB also highlights the use of gaming technology for exploring real-life or grey areas and suggests firms keep this emerging area under review.
The new FMSB guidance on surveillance and training is contained in Statement of Good Practice for Surveillance in Foreign Exchange Markets, and Statement of Good Practice for Conduct Training.
The FMSB’s Statements of Good Practice differ from FMSB standards, which all members are expected to comply with. They highlight current good practice and member firms are expected to consider them and amend their own practices if appropriate. As well as the FMSB’s 41 member firms, the Statements of Good Practice will be shared with Non-Member firms and industry trade associations, who are encouraged to consider them.
Last month, the FMSB published a draft standard on the New Issue Process for the Fixed Income Markets in draft transparency form for comment, following earlier standards on Reference Price Transactions and Binary Options in the commodities markets.