New year regulatory resolutions for capital markets

As we hurtle through January, it’s worth taking a step back to think about how you and your compliance team can best position you for regulatory challenges this year. We’ve highlighted a few things below to tick off the list.

CASS and title transfer collateral arrangements

TTCA is an acronym that most people will have become tired of hearing in the last few years. It’s something for which the rules have not changed since 2018 and following the FCA’s Dear CEO letter to brokers in wholesale markets in 2020, many firms reviewed their set up. We often see firms relying on a TTCA policy that refers to average expected trading as underpinning the driver for the client’s obligation to the firm. Provided this approach is documented clearly and is justifiable in the context of any particular client, it can be a compliant approach to take. However, changing market conditions can influence the core approach you should take as well as impacting the thresholds used and the frequency with which arrangements are reviewed and adjusted. As we get into the new year it’s worth reviewing your approach, making sure that it’s appropriate in the context of the current market conditions.

Trade surveillance calibration

Firms need to carry out appropriate trade surveillance to identify instances of potential market abuse. But we frequently see cases where firms don’t carry surveillance out at all or where systems are so poorly calibrated that it makes the surveillance fairly useless. Even where we see good monitoring systems, trading patterns and client activity can change over time and that often means that calibration needs to be adjusted. It’s a good idea to take a step back and check whether your transaction monitoring is fit for purpose. Take the opportunity to look at the parameters used and assess whether they’re producing the right alerts.

Are you making the best use of limited resources?

Many firms are experiencing financial constraints at the moment and management often find themselves having to make tough decisions about how to use limited resources. We often see firms shying away from technological solutions to routine tasks because of the associated cost. But with more solutions on the market than ever, it’s a good time to look at the financial savings that an investment in technology might bring. Whether it’s systems for trade surveillance, CASS reconciliations, transaction reporting validation or another area of regulation, an automated solution can significantly reduce the amount of time your team members need to spend on the task. This means that their time can be spent on more technically demanding tasks. Similarly, with an automated solution, firms can reduce the risk of human error and as such, have a more reliable and accurate process – one reason we see the FCA expressing a preference for automated solutions in many cases.

Transaction reporting – are you keeping standards high?

We’re six years into the MiFID II transaction reporting regime and yet we still see similar errors being made. Sometimes this is because something has gone wrong in the interpretation of the requirements from the start meaning significant back-reporting is needed. Sometimes it’s a case that something has changed in the firm’s systems and controls meaning that reporting processes that were previously working well are now falling short of the requirements. As well as the required three-way reconciliations, you should take the opportunity to check the logic of your reporting, particularly taking account of some of the common errors the FCA have highlighted in various Market Watch publications over the last couple of years.

Don’t get complacent about your prudential returns

Many firms subject to the MIFIDPRU rules have never seen challenge from the FCA on their reporting approach, other than the general results of the FCA’s sample review in 2023. And we often speak to firms that question whether the FCA ever does anything with the returns they submit. The FCA looks at the quality of the returns submitted including comparing them for consistency against other data provided by the firm, for example fee tariff data. It will also compare firms to each other to identify outliers. Many firm struggle with the interpretation and application of some parts of MIFIDPRU and this is something that could result in a firm being identified as an outlier and becoming subject to FCA scrutiny. Some of the areas we often see issues are:

  • the non-compliant application of transitional arrangements, whether through non-application, misinterpretation or relying on the arrangements after they have expired.
  • struggling to differentiate between capital and liquidity requirements.
  • confusion around the type of capital that can be used to fund risk requirements.
  • a lack of understanding of the consolidation rules, resulting in mistakes being made in application.
  • lacking precision in the application of K-Factors.
  • failure to comply with all notification requirements in MIFIDPRU.
  • lack of severity or relevance of stress testing scenarios.

We can help

There’s plenty to keep you busy in 2024. We can help with any of these issues, whether it’s through giving you specialist technical advice or bolstering your team with experienced resource.