In its latest Market Watch 79 report, the FCA has shed light on significant lapses in market abuse surveillance controls among authorised firms.
According to Kaizen, the findings underscore a pressing need for robust and increasingly sophisticated surveillance measures within the financial sector.
According to the report, failures in market abuse surveillance were primarily attributed to flawed implementation of surveillance systems, inadequate change management controls leading to errors, and crucial information feeds, such as trade or order data, being omitted for certain business flows. This resulted in certain activities slipping through the cracks without proper monitoring, rendering surveillance alerts either partially or wholly ineffective due to insufficient testing.
The duration it took firms to identify and rectify these failings varied significantly, ranging from a few weeks to a staggering two years or more. Coincidentally, a US-based firm was recently penalised $350 million for similar infractions related to the absence of trading and order data in their surveillance platforms.
Among the observations made, the FCA highlighted instances where firms had neglected to activate news feeds to detect insider dealing, a deficiency only brought to light after intervention from the FCA. Additionally, inadequate design and configuration of insider dealing alert parameters led to potentially suspicious activities going unnoticed for extended periods.
In a separate review, the FCA analysed the frequency and methods employed by several major investment firms to test the effectiveness of their client order front running models. The lack of a formal testing process was noted in some firms, while others overly focused their reviews on parameter calibration. Factors like financial instrument types, market participants, trading methods, and accessed trading venues were cited by the FCA as crucial considerations in such reviews.
Furthermore, the FCA outlined key steps firms should undertake to mitigate surveillance failures, including ensuring the accuracy and completeness of trade and order data, establishing comprehensive governance arrangements and testing documentation, tailoring alert models appropriately, and implementing proactive measures to prevent failures.
The FCA’s emphasis on effective market abuse surveillance through thorough reviews indicates a growing commitment to elevating industry standards. By pushing for more advanced and sophisticated practices, the regulator aims to mitigate the significant repercussions of inadequate surveillance controls for firms. Firms are urged to heed the observations outlined in the Market Watch 79 report and assess the adequacy of their surveillance arrangements accordingly.
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