In its latest newsletter – Market Watch 69, the FCA provides further commentary on the need for enhanced surveillance systems and controls across capital markets. Their observations have been based on arrangements in small and medium-sized firms. This complements their previous newsletters reporting the outcomes of STR/STOR supervisory visits to firms and draws on the results of an associated questionnaire.
Comprehensive approach to market abuse risk assessment needed.
The FCA conclude that firms continue to leave themselves open to the possibility of falling short when it comes to identifying market abuse. Firms continue to rely on risk assessments that fail to adequately assess risk across the full range of their business. Firms must consider all possible scenarios of market abuse across all the asset classes and instruments they trade. Only by developing, and regularly updating, such a comprehensive and detailed assessment of risk can firms confidently align their monitoring programmes and ensure effective surveillance.
Solutions that have the ability to supervise and surveil across the enterprise, and also provide the functionality to customise rules will be key when controlling the specific parameters within specific business units, scaling surveillance in line with specific risks.
Order and trade surveillance that considers differences in asset class.
Finding common ground with a recent VoxSmart study published in City A.M., the FCA have encountered from their own research instances of “little or no monitoring taking place” across firms. However, when surveillance is undertaken, effectiveness is not always optimal. Key considerations regarding the various characteristics of different asset classes to generate alerts can ensure effective monitoring of trades when utilising a tailored solution which additionally reduces false positives. Opting for a “common threshold” approach to generating market abuse alerts casts too wide a net and may undermine effective monitoring.
Surveilling and supervising trading and sales activities is complex, however with an automated trade reconstruction solution the aggregation of key information is made easier to inform situations and understand context. This approach allows for a quantum leap forward in surveillance by utilising advanced capabilities in voice and IM capture, and enhanced data integration, which increases supervisory effectiveness throughout the trade lifecycle.
Policies, procedures and outsourcing
The FCA calls out inconsistencies across organisations in their policies and procedures relating to market abuse and call for detailed and up-to-date documentation and guidance to enable surveillance staff to efficiently detect malpractice. The risk of market abuse is exacerbated if parts of the surveillance operating model are outsourced to elsewhere in the organisation.
Technology that enables accountability and reporting, with clear allocation of alerts to surveillance analysts, as well as tracking and recording of alerts through to closure allows supervisors to oversee effectiveness of surveillance frameworks. The capability is effective even where surveillance is ‘outsourced’ to another region / legal entity within the group.
The FCA identify the risk of conflicts of interest, particularly in smaller firms, if surveillance is conducted wholly or in part by front office staff, and urge adequate training both to avoid such conflicts and to ensure staff understand when and how to escalate concerns. The newsletter states “to ensure staff act appropriately, firms should consider whether their market abuse training is effective and tailored to the risks associated with the desk, asset classes traded, client types and other relevant factors”.
Groups within a firm will typically have their own mandates and procedures, but this doesn’t mean that different groups should not leverage the same technology stack. Historically, compliance surveillance departments have operated independently of the front office, meaning often that they use different systems. This set-up is inefficient and risks the inconsistencies and potential conflicts of concern to the FCA. Solutions where roles and permissions can be managed centrally across a single data set allows each team to independently execute their own procedures whilst not compromising the technological integrity or duplicating infrastructure.
In equipping firms with the technology to ensure effective and thorough trade and communication surveillance, VoxSmart seek to provide capital market firms with a comprehensive solution that can be mobilised quickly and efficiently giving assurance of regulatory compliance and the power to communicate with confidence across multiple channels and platforms. The smarter way to monitor your communications.
Should you wish to learn more about how our solutions can help your firm then contact us today for a demo here!
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