On September 24, the UK Financial Conduct Authority (FCA) published Issue 56 of Market Watch, its newsletter on market conduct and transaction reporting issues.
Issue 56 contains articles that provide a useful reminder in relation to obligations in relation to market abuse surveillance and payment for order flow (PFOF).
- Market abuse surveillance:
- The FCA reminds firms that relying on peer standards, such as popular “out of the box” alert settings and average peer output volumes, will not necessarily satisfy the requirements of the Market Abuse Regulation (MAR). Firms risk failing to comply with MAR if they assume that because a certain alert calibration is appropriate for their peers, then it must be appropriate for them.
- Firms also are reminded that the list of indicators for fictitious devices, false or misleading signals and price securing in MAR is not exhaustive. Firms treating them as exhaustive may therefore fail to identify the risk of other types of market manipulation, which are still within the broader scope of MAR.
- The FCA believes that suspicious transactions and order report (STOR) submissions are lower than they should be in some areas, for example in fixed income products. Firms are, therefore, reminded that they should consider trading activity in correlated products to achieve effective surveillance. The FCA also reminds firms that when conducting STOR supervisory visits, they focus primarily on the firm’s own compliance with the STOR regime, rather than employees’ compliance with their individual regulatory obligations.
- Firms are reminded that the FCA will take action against firms who characterize their relationship with liquidity providers in a way that does not reflect economic reality and, in fact, appear to be PFOF arrangements.
- The FCA also will continue to examine brokers’ order routing to overseas entities for any evidence of circumventing behavior that breaches the FCA’s rules, such as when relevant orders are handled at any stage by a UK broker but are subject to two-sided charging contrary the FCA’s rules on PFOF.
- Firms also should analyze the capacity in which they and different counterparties involved act, rather than look to their or different counterparties’ respective general business models.
Issue 56 of the FCA’s Market Watch is available here