Financial crime update: market abuse, ‘flying’ and ‘printing’

The FCA has been looking at various aspects of market abuse and financial crime. Here’s a quick update on the Regulator’s findings – with some useful reminders for firms about required and expected practice.

Market abuse surveillance

The FCA has reiterated past concerns about firms with vendor-supplied market abuse surveillance systems using ‘out of the box’ and ‘industry standard’ settings to calibrate their alert parameters. The FCA reminds firms that every business and its client base will be unique. Therefore, relying on peer standards – such as popular ‘out of the box’ alert setting, average peer parameters and average peer output volumes – will not necessarily satisfy the requirements of the Market Abuse Regulation (MAR). The FCA stresses that the lists in MAR (e.g. indicators for fictitious devices, false or misleading signals and price securing) should not be treated as exhaustive.

Suspicious transaction and order report (STOR) submission across asset classes remains inconsistent. The FCA believes submissions are lower than they should be in some areas, particularly fixed income products. The Regulator emphasises the importance for effective surveillance of considering trading activity in correlated products and using techniques and methodologies appropriate to the products under surveillance (e.g. not using price-driven surveillance where yield is the primary basis on which pricing and trading is undertaken).

Note that firms cannot excuse their potential failure to meet their MAR obligations on the grounds that some of their peers are failing in the same way, or because the responsible employee has only recently joined the firm.

‘Flying prices’ and ‘printing trades’

The FCA has recently expressed concern about the use of trading platforms and persistent chat systems by broking firms to advertise prices that are not supported by a client order and also fictitious trades – activities referred to as ‘flying prices’ and ‘printing trades’.

‘Flying’ involves a firm communicating to clients or other market participants – via screen, instant message, voice or other method – that is has bids or offers, when these are not supported by, or perhaps even derived from, an order or a trader’s actual instruction. ‘Printing’ involves communicating that a trade has been executed at a specified price and/or size, when no such trade has take place.

As the FCA warns, if false prices and/or trading activity are advertised to the market, there is a risk that trading decisions may be made based on misleading information and market participants could suffer financial harm. The FCA believes that practices such as Flying Prices and Printing Trades may amount to criminal offences and/or market abuse and/or unacceptable market conduct in breach of its Principles for Businesses. 

The FCA’s rules require firms to establish and maintain effective management oversight, policies, procedures, systems and controls to ensure that market-facing employees are not engaging in behaviours that may constitute a criminal offence, market abuse or unacceptable market conduct. 

Useful reminders

Consistent through all of these missives from the FCA is that firms should not rely on standardised or peer benchmarked policies, procedures and controls. Firms must implement and maintain controls that are appropriate and proportionate to the scale, size and nature of its business activity. 

In establishing appropriate oversight to ensure market-facing staff are acting appropriately, firms should consider what processes they have in place for training and informing staff about the potentially abusive nature of ‘printing’ and ‘flying’. They should also review the degree to which they can monitor trading platforms and persistent chat systems to identify such activity. If these practices have occurred, firms must inform the FCA.

Please contact the Regulatory Consulting team for more information and advice on any of these issues above.

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