First Market Watch published since MAR's implementation
The Financial Conduct Authority (FCA) has published Market Watch (No. 51), the newsletter on market conduct and transaction reporting issues, its first edition published since the implementation of the Market Abuse Regulation (MAR) in July 2016. The edition sets out the FCA's high level observations following its review of the market abuse systems and controls of a sample of registered market makers in small and mid-cap equities.
Market Maker Review
Click here to read Market Watch or read on for a summary of the key findings which are relevant to all firms engaged in market making activities.
Market abuse awareness
- Market abuse awareness varied considerably within the firms. Whilst compliance teams were aware of the key risks, the awareness of senior management and members of the trading and market making teams fell below expectation.
- Regular and detailed risk assessments are key to mitigating risk and help to demonstrate that there are effective controls in place.
- Maintaining effective information barriers is essential to mitigating market abuse risks, including insider dealing and the unlawful disclosure of inside information.
- Ideally, firms should physically segregate individuals or teams with regular access to confidential or inside information (such as corporate finance or investment banking operations).
- If this is not possible, firms must take extra steps to mitigate risk, such as rolling out specific staff training and integrating members of the compliance team with front line operations to improve firm surveillance and information management.
Wall-crossing procedures and insider lists
- The level of documented wall-crossing procedures was generally poor across the firms reviewed.
- Certain firms used their compliance teams as 'gatekeepers' in all wall-crossings. Compliance were tasked with assessing whether the wall-crossing was necessary, who should be wall-crossed and when was the most appropriate time to do so. The FCA noted that this was an effective approach as it centralised the wall crossing process and provided consistency across transactions.
- Firms must consider the 'need to know principle' when determining who needs to be wall-crossed on a transaction and when they must be included in an insider list. Persons privy to inside information must be kept to the minimum necessary in order to carry out the task or role to an appropriate standard.
- Details on several insider lists were identified as being inaccurate or missing entirely – firms are encouraged to consider if their insider lists are accurately documented and suitably detailed.
Market abuse monitoring and surveillance
- Periodic monitoring of market makers' trading activity during periods when individuals at the firm had been wall crossed is an important step in mitigating risk.
- Firms need to be careful when choosing suitable surveillance tools and setting alert parameters. The most effective programmes involve significant and careful calibration of the alert parameters and logic based on the surveillance officers' experience of that firm's trading patterns and clients. The FCA refers to Market Watch (no.48)in which it gave some observations on the calibration of surveillance systems.
The FCA will continue to monitor the effectiveness of firms' market abuse systems and controls, which may involve firm specific deep dives and broader thematic studies of groups of firms or sectors. If you have any queries in relation to MAR's implementation and its impact on your market abuse systems and controls, please contact your usual contact at Hogan Lovells or one of your listed contacts.