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JP Morgan has agreed to pay a fine of $920 million for market abuse in the precious metal and US treasury markets. This is the highest fine imposed so far by a regulator for market abuse and is a stark reminder of the need to identify, investigate and stop market abusive behaviour.
JP Morgan entered the markets placing orders to either buy or sell silver, platinum, palladium, gold, Treasury bond futures contracts and Treasury notes over a period of 8 years. According to the CFTC order against JP Morgan there was no intention to execute these orders; they were placed to give a false impression about the true supply and demand of these markets. This practice known as ‘spoofing’ was carried out by JPMorgan’s traders on the bank’s own trading accounts and in some occasions to facilitate trades carried out by hedge fund clients who would benefit from the distorted prices.
JP Morgan failed to investigate abusive behaviour
According to the CFTC, the bank failed to investigate and stop this abusive behaviour despite numerous red flags, such as alerts being triggered by their surveillance system, internal concerns raised by a trader, and multiple enquiries made by the CFTC in this matter.
Investigations into market abuse may take a long time before they are brought into the public eye, especially where abusive behaviours span over a number of years. But one thing is certain, regulators are becoming more sophisticated with their own in-house surveillance systems, and they expect firms to be in the position to detect at the very least the same abusive behaviours they do, and to be capable of investigating and stopping these behaviours when they see them.
Disruptive Trading Practices under the Commodities Exchange Act
Section 4c(a)(5) of the Commodities Exchange Act prohibits disruptive trading, practices or conduct. “Spoofing” under the act covers all bid and ask activity in all products traded on registered entities, including DCMs and SEFs. The action against JP Morgan highlights the importance of an effective market abuse control framework. Suspicious transactions that are identified by the regulators triggers an alarm about the appropriateness and effectiveness of a firm’s market abuse systems and controls.
The JP Morgan case is a sharp reminder of the key areas of regulatory focus:
· Surveillance systems
Surveillance systems should be appropriate to the firm’s market abuse risks. Off-the shelf surveillance systems that are not tailored and based on a market abuse risk assessment are not adequate and are unlikely to pick abusive behaviours.
· Policies and procedures
Having adequate and up-to-date policies and procedures is necessary to ensure those in charge of investigating alerts understand their obligations and have clear procedures in place to follow. This includes having in place at least a clear market abuse policy.
An effective training program should be tailored to each firm to ensure employees understand their obligations and market abuse risk the firm is exposed to.
Having enough resources is key to ensure that all suspicious transactions and orders can be investigated fully in a timely manner; that policies and procedures are updated where required and training delivered at least once a year.
How we can help
Bovill can carry out a health check on your current market abuse control framework to ensure it is effective and aligned to the regulators’ expectations. We can also help you to:
- Perform a full assessment of the market abuse risks in your business
- Design effective market abuse policies, procedures and controls
- Help you interpret and refine the outputs of your automated trade surveillance
- Triage and investigate alerts generated by your surveillance software
- Test the robustness of existing surveillance systems to provide assurance to senior management
- Provide training on the key risks, your obligations and the potential civil and criminal sanctions.