More market abuse fines could emerge as global regulators turn their attention to control failings
Given the importance of maintaining confidence in authorised firms and the world’s financial markets we can expect regulators around the globe to continue to clamp down on participants who commit or facilitate market abuse.
Control failings will be punished
In August, the SEC and CFTC imposed substantial fines in the US on several large financial institutions for unauthorised communications on WhatsApp, iMessage and Signal and for poor record keeping and supervisory failures.
Given that these issues are not confined to the US, further enforcement action can be expected in other major financial centres given how the use of unauthorised communication channels can undermine and jeopardise an otherwise robust market abuse control framework.
The UK’s Financial Conduct Authority has previously fined firms for having deficient surveillance processes, including communications surveillance.
Changing landscapes and challenges
The pandemic which led to more staff working remotely, coupled with the proliferation of new communication channels have both served to increase the challenges faced by firms when developing their market abuse control frameworks. To emphasise this point, US prosecutors recently charged an individual for allegedly disclosing inside information using Xbox audio chat.
With the patchwork of communication channels now available and ever changing technology, firms are considering whether they should be more selective to make it easier to govern. Although these challenges mean that integrated communications surveillance is more important than ever, there are more solutions available to investment firms.
In the main, given the challenges with data storage and importance of scalability, the shift is towards using surveillance offerings developed by specialist third parties that offer offsite, cloud solutions.
In relation to market manipulation, layering and spoofing continues to be one of the most common types of abuse being committed. For example, on 22 August two commodity traders were given prison sentences after jury trial convictions in the US for spoofing futures on precious metals.
Market abuse risk assessments and controls
Given the need to monitor pre-trade activity, resultant transactions and all relevant communication channels for potential market abuse, there is a need for an automated solution in all but the smallest of firms.
Although data collection and technology play a leading role when developing a robust market abuse control framework, there are other important factors to consider. General market abuse training for all staff as well as deeper, tailored training for different teams including surveillance analysts is crucial.
Having a comprehensive understanding of the business conducted, IT systems, applicable regulations and associated market abuse risks is essential. Just as important is the need to capture the firm’s existing market abuse controls that help mitigate these risks. Concentrating on the residual risks associated with insider dealing and market manipulation then becomes the focus when reinforcing the robustness of your control framework.
The changing landscape and these latest cases emphasise the need for effective controls and the importance of having a holistic and integrated approach to surveillance, including all communications channels.