The Financial Conduct Authority (FCA) recently issued a Questionnaire, "The Risk of Market Abuse in Asset Management firms", to a broad range of firms, requesting details on their arrangements and controls in this area. This appears to be part of a wider thematic programme of work outlined in its Business Plan for 2018/2019 – for a summary of that paper click here.
We believe that this Questionnaire contains some interesting insights into FCA priorities in this area that will be of interest to all asset managers.
This Questionnaire covers a number of topics including:
- Business Model – Including details of the total AUM, financial instruments traded, daily average trading values, typical holding periods, nature of strategy and number of suspicious transactions and orders (STORs) identified (including “near misses”).
- Policy and Oversight – Details about market abuse policies, staff training, market soundings procedures and information barriers.
- Controls – Trading arrangements, including physical segregation from portfolio management and restricted list procedures.
- Oversight – Compliance arrangements, including record keeping and management information on investigations and alerts.
- Surveillance – Details on surveillance systems (including communications surveillance), methodologies by asset class, including use of manual versus automated processes, number of alerts generated and elevated for further investigation, testing around price-sensitive announcements and any planned enhancements.
- Personal Account Dealing – Employee transaction approval arrangements, minimum holding periods and breaches (trading without prior approval).
- Training on Market Abuse Risks – How often, method of delivery, whether all employees are covered and assessment of effectiveness.
The deadline for the Questionnaire was 15 August 2018. FCA state they will be analysing the responses and may contact firms to clarify answers.
Where is the FCA going with this?
Since the implementation of MiFID II in January of this year the FCA has much more data on trading activities through the increased number of firms who are required to submit transaction reports and across a broader range of asset classes than ever before (in particular, across Fixed Income, Currencies and Commodities "FICC" markets – an area of focus already expressed by the FCA given that it acknowledges this section of the market has received “less focus” than equities).
There has also been a significant increase in the number of Suspicious transaction and order reports "STORs" submitted to the FCA, up from 3,008 in 2016 to 5,495 in 2017, with notable growth from July 2016, when the new Market Abuse Regulation came into force.
It is not difficult to see how some smart analysis of the huge volumes of data on offer, coupled with the increased reporting of STORs from firms gives the FCA the tools it needs to identify suspicious activities, and pursue those individuals responsible.
I did not receive the questionnaire. Do I need to request it?
Any firms who have not received the Questionnaire do not need to request a copy. However, it may be worthwhile to check whether it has been received by someone else in the firm, or been blocked by email filters.
Lessons Learned from the FCA’s Questionnaire
What are the FCA’s priorities in identifying key market abuse risks in firms?
The FCA’s approach signals an ever increasing need for robust risk assessment of a firm’s exposure to market abuse, dependent on a number of factors including trading volumes, instruments, whether and how inside information is received and appreciation of the relevant risks linked to trading strategies to ensure that appropriate means of surveillance can be employed.
What does the FCA believe are some of the appropriate controls to manage market abuse risks?
Again it depends on the activities of the firm. For some firms it may be necessary and proportionate to have automated surveillance software to analyse trading data. Other firms may find manual monitoring continues to remain sufficient. Consideration should be given to both trading and communication surveillance.
Are there any messages here for staff training and assessment?
We recommend that employee training is up-to-date and has covered all relevant staff members (with appropriate tailoring). Check that employees are aware of the process for reporting STORs. Also ensure that the process for receipt of market soundings and information barriers is understood, including any designated contact points nominated internally.
What compliance documentation should be in place?
Policies and procedures should be in place to document the firm’s arrangements for the prevention and detection of market abuse. Market abuse risk should be included within the firm’s Financial Crime Risk Assessment.
What is the role of compliance in preventing market abuse?
Compliance should conduct surveillance work independently of any front-office activities. Typically, Compliance is the point of contact for employees to raise suspicions internally, and will conduct appropriate investigations before deciding whether to submit a STOR to the regulator. It is usually responsible for conducting the Financial Crime Risk Assessment with appropriate input from across the business.
Do I need to review the firm’s surveillance and investigation procedures?
The FCA has not at this stage set out any specific expectation that firms review their processes. However, we believe that more detailed recommendations from the FCA are likely to follow this thematic work in due course. If you have any concerns about some of the areas highlighted above, a review of overall arrangements may well be timely.