In its latest newsletter on market conduct and transaction reporting issues (Market Watch 56), the Financial Conduct Authority (FCA) highlights recent observations about firms' surveillance systems. Following previous publications on the topics and the implementation of MiFID II, firms should treat this paper as a clear warning shot that the FCA will not tolerate non-compliance. The FCA flags the below issues.
- In the calibration of surveillance systems, the FCA reminds firms that every business and client base is unique and, therefore, relying on peer standards, such as 'out of the box' alert settings, average peer parameters and average peer output volumes, will not necessarily satisfy the requirements under the Market Abuse Regulation (MAR). Each firm is responsible for making its own judgements about alert calibration, and firms risk failing to comply with MAR if they assume that because a certain calibration is appropriate for their peers, it must be appropriate for them.
- When assessing the risk of market abuse, firms are reminded that the lists of indicators in MAR, and legislation made under it, are not exhaustive.
- Submission of suspicious transaction and order reports (STORs) across asset classes remains inconsistent and submissions in fixed income products are lower than they should be.
- In the context of fixed income products, the FCA stresses that consideration of (1) trading activity in correlated products, and (2) yield, are an important part of surveillance. Where transaction data is sparse, it could be helpful to carry on further analysis of larger trades; trades that resulted in large positions in an instrument or that were not booked in a timely manner; trades in related financial instruments; and orders and trades in instruments with pre-existing large positions.
- The FCA notes that some firms are falsely trying to justify their MAR failings. If the FCA takes no action against one firm, it is not an assurance that it will not take action against a different firm as many factors are taken into consideration. Also, lack of compliance with the STOR regime cannot be mitigated by the fact an employee has only recently joined the firm and does not feel they are responsible for a predecessor's arrangements.
Firms would be well-advised to continually evaluate their MAR risk assessments and the surveillance they have in place to ensure they are fit for purpose.
Each firm is responsible for making its own judgements about alert calibration, and firms risk failing to comply with MAR if they assume that because a certain calibration is appropriate for their peers, it must be appropriate for them.