Market abuse - brokers should be ready for searching questions

Increasing numbers of brokers are being probed by the FCA about their market abuse controls. Market abuse is one of the last issues addressed by the FCA’s Dear CEO letter to the wholesale broking industry. But this area is certainly not low down on the priority list for supervisors. The FCA’s attitude is clear, not just from the punchy tone of the Dear CEO letter, but also by the FCA’s supervisory work. A number of brokers have been asked searching questions about their market abuse risk, internal controls and surveillance arrangements in the last 12 months.

The Dear CEO letter states that the overall risk of market abuse in the sector is high, and points to two specific sources of risk that are a cause for concern:

  • That clients of wholesale brokers misuse their services in order to pursue strategies that are abusive, potentially using the broker’s status as intermediary to disguise their intent
  • That the trading operations of brokers are privy to sensitive information about client orders and trading intent, which may be misused by the broker’s own staff.

In both cases the letter states that controls in this area are generally not well-developed, citing in particular a perceived low level of compliance by brokers’ own staff with personal account dealing policies, and a low level of investment in surveillance technology in the sector as a whole.

What should firms do next

Every conversation with the FCA on market abuse seems to begin with a request to see a market abuse risk assessment. This is also an increasingly common theme with exchanges and even direct counterparties. All firms should have in place a comprehensive, realistic assessment of the market abuse risks that they face – covering both the risks arising from their client relationships, and also their own physical environment, information flow and staff.

Once in place, controls should be carefully selected and tailored to the risks faced. Controls around the physical and IT environment should be designed to limit risks associated with staff misconduct. Likewise, a direct link should be demonstrable between the client risks identified in the risk assessment, and the selection and calibration of alerts in the market abuse surveillance system. If you operate an MTF or OTF as part of your wider business, you should also consider the additional, often overlooked, market abuse risks identified in the delegated acts to MiFID II.

Finally, the market abuse risk assessment should remain a living document, updated after the application of new controls, the discovery of new potential breaches, and the addition of new business lines or activities which have novel risks associated.

Responding to the FCA’s Dear CEO letter to wholesale brokers

Bovill is working with the broker community to respond to the FCA’s Dear CEO letter in a number of areas. We can provide a comprehensive health check against all of the issues raised by the letter, and also regularly help firms to develop their regulatory compliance frameworks.

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