On 16 June, Ancoa hosted a roundtable on “FICC Markets: The Road to MAR compliance” in collaboration with Grant Thornton, one of the world’s largest accountancy and advisory organisations. Industry leaders representing the fixed income, currencies and commodities (FICC) markets attending the roundtable focussed on the readiness of FICC markets to comply with the newly implemented Market Abuse Regulation (MAR), including automated surveillance and the ability to detect both market manipulation and insider dealing.
MAR came into effect on 3 July and the new regulations impact many parts of a firm’s operations. The changes to regulations would likely require substantial changes to the following policies: research; personal account dealing; conflicts of wall crossing; procedural updates surrounding suspicious transactions and orders reports (STORs); additional staff training; and enhancements to key systems including changes to monitoring and surveillance capabilities.
I scream, you scream... - challenges of MAR
Article 16 of MAR is of particular interest to FICC markets given that they are, by definition, multi-asset, multi-participant and multi-market. The relevant clause specifies that investment firms and market operators are required to detect and prevent attempted market abuse. This focus on attempted manipulation moves the attention of firms to a system of thematic case management. It is also important to note that intent is not a requirement; unintended reckless behaviour is enough to raise a STOR. In this sense, it is no longer adequate to focus on acute events - firms also need to detect deviations from behavioural norms and reckless trading. FICC markets in particular need to start looking at changing their cultural behaviours and be alert as to the monitoring and understanding of how people are trading within their firm. Financial regulators have made it clear that there is a pressure and expectation that cultural changes need to be made within firms, with the ‘three lines of defence’ approach put clearly into action, including the responsibility of front office, compliance and internal audit.
Apart from a cultural change, surveillance systems themselves also need to be reconfigured. With some firms operating a multitude of Order Management Systems and Trading Systems side by side, proper integration needs to be undertaken in order to combat the all-too-common silo legacy and the problems dealing with disordered data that financial institutions are currently having to grapple with.
Cherry-on-top: Questions on MAR from FICC industry leaders
There were several key areas that were raised by Ancoa and Grant Thornton:
Are there any surprises around monitoring request for quotation (RFQ)-based venues that lie in wait?
FICC markets generally do not deal with anonymised parties, an aspect of self-policing arises in that if a received quote is not in line with market prices, any counterparty providing ‘odd’ quotes could be excluded from future bids. If, however, other parties are colluding, the self-policing approach would break down as there is often not a clear point of price reference.
Firms need to look at this in a different light. Whilst some unusual behaviour might not be illegal according to the rules, it is still worth investigating from a reputational viewpoint. The optimal set-up is to have the right balance between behavioural surveillance and monitoring, as well as regulatory surveillance and monitoring. It is in this area that a reputable market surveillance vendor can help firms do this well.
What about cross-market or cross-instrument manipulation?
We have created alerts specifically designed for FICC markets, using comparisons from a reference point of view. One of the alerts, for example, looks at how yield compares against benchmarks of comparable instruments. This is central to our contextual approach which is literally an attempt to bring in as much context as is available. By making comparisons of the same instrument between different venues (by identifying them correctly) and on a single venue relating to different instruments, it makes it easier to see how instruments are truly performing.
The key to spotting cross-market or cross-instrument manipulation is to ensure an automated surveillance solution has the ability to reference both data across venues and comparable instruments.
How can firms monitor against attempted manipulation?
This issue has been worrying some firms because attempted manipulation may not be linked to one single event. It becomes very difficult to look at attempted manipulation when there is no result/change to profit/loss because the reason as to why the instance has occurred is harder to drill down into. Having said that, however, some clear-cut cases of attempted market abuse do exist, for example, the cancelling or amending of a buy-order before a price drop in an instrument.
It was commented that in an RFQ model, the identification may be made easier from a buy-side or sell-side perspective because the actual request is seen (depending on what is being monitored), rather than anonymous as is the case with a limit order book. In the end, it comes back to a cultural approach with the industry as a whole performing better surveillance, as well as the integration of a thematic approach into surveillance methods through strong visualisation and case management.
How can surveillance be incorporated on voice-initiated trades?
Voice broking plays a prominent role in monitoring FICC markets. Automated surveillance systems can overlay a voice transcript onto a graph with transactions and allow Compliance Officers to playback the audio and reconstruct the sequence of events. This technology becomes central in helping firms build a full picture.
Some automated surveillance systems can also equip firms with very advanced visualisation technologies. Using these visualisation techniques, firms can visualise an order and listen to it simply by clicking on it. This is not a matter of simply taking the voice recording and separately transcribing it so only the metadata is available. With these advanced systems, the audio and transcript originating from a call are linked. In order to put a call into the surveillance system, the audio recording system API is tapped into and the audio is put on the same timeline, not simply just the metadata. The analytics are then run over the data from the audio transcript.
“Not vanilla”: Meeting MAR’s expectations
In order to meet the requirements of MAR, organisations need to start with the configuration of a surveillance system, creating alerts and monitoring procedures proportionate to a firm’s business risks. Because the regulation requirements are not descriptive, a venue and vendor will need to qualify at a firm-level as to how the surveillance should be carried out. When selecting surveillance systems, the ability to perform thematic case management and analysis is key. Alerts can then be calibrated specifically for your firm.
FICC covers such a wide range of instrument types that these markets could not in any way be considered as “vanilla”. Because of this, an agile approach is needed in order to reduce false positives and false negatives, and also to ensure that the system becomes more sophisticated over time. Trading venues with large volumes need an automated surveillance system that is scalable and is capable of ‘learning’ over time. Systems for smaller buy-side firms holding onto positions for a longer period of time need the ability to perform statistical analysis. Re-calibration and resetting of parameters, whilst necessary for large venues, needs to be proportional to the complexity of the business.
“31 flavours”: Agility is key
The complexities of the FICC markets provide extra challenges for firms in order for them to meet EU-wide Market Abuse Regulation requirements. Surveillance systems need to be updated to provide the ability to capture intent in the form of a STOR. RFQ-driven venues, cross-market & cross-instrument manipulation and voice-generated trades are all relevant concerns to FICC traders. It is up to firms and venues to ensure that a market surveillance system can efficiently deal with these complexities before implementation. Agility is key, whatever the flavour of your FICC market, and the choosing the right automated surveillance system will help ensure that your firm’s approach to market surveillance becomes more and more sophisticated over time.
By Stefan Hendrickx, Founder and Executive Director, Ancoa.