Navigating the Regulatory Landscape of Trade Surveillance: A Guide for Compliance Leaders
In the face of global regulatory efforts to mitigate market abuse, the onus is on compliance professionals within broker-dealers, trading firms, and intermediaries to ensure effective trade surveillance systems.
As regulatory bodies like the U.S. Securities and Exchange Commission (SEC), the U.K. Financial Conduct Authority (FCA), the Monetary Authority of Singapore (MAS), and the Hong Kong Securities and Futures Commission (SFC) adopt a proactive enforcement approach, vigilance becomes crucial for compliance teams to stay ahead of regulatory priorities and risks.
Eventus just launched a global report, entitled Market Surveillance Priorities of Global Regulators, that analyzes the priorities of global regulators to help guide compliance leaders as they seek to combat market abuse, protect companies and employees, and reduce the risk of penalties and fines.
The report includes:
- What global regulators deem essential to broker-dealers and their compliance teams
- An inside look at the regulators that have announced initiatives to boost their own surveillance capabilities with better datasets and data analytics
- Recommendations for compliance leaders as they work to identify regulatory gaps and advance reporting capabilities to follow complex requirements
In particular, the authors of the report point to specific developments at the world’s top financial regulators.
The U.S. Securities and Exchange Commission
The SEC emphasizes the importance of adhering to trading practices and regulations like Regulation SHO and Regulation Best Execution. As part of the SEC’s Division of Examinations, inspections have highlighted regulatory gaps, trade surveillance deficiencies, and best practices. The agency is exceptionally watchful about potential conflicts of interest that may adversely impact retail investors and rules associated with short-selling practices. The SEC plans to examine entities offering new products, services, or practices, including online brokerage services and automated investment tools. Special attention is directed towards digital assets, particularly cryptocurrencies, assessing compliance, risk management, and disclosure practices.
The U.S. Financial Industry Regulatory Authority
The 2023 Report on FINRA’s Examination and Risk Monitoring Program introduces new sections on “manipulative trading” and complex “Regulation SHO.” The report provides valuable insights into FINRA’s oversight and enforcement activities, highlighting areas for firms to improve their compliance programs.
Regulation SHO
FINRA emphasizes the need to prevent the misuse of locates for hard-to-borrow or threshold securities. They recommend implementing robust supervisory controls to enhance compliance and raise concerns about manipulative trading in small-cap IPOs.
U.S. Commodity Futures Trading Commission
In its fiscal year 2024 budget request, the CFTC seeks increased resources for enforcing against manipulative and disruptive trading. The commission aims to detect and prosecute misconduct impacting derivatives market integrity and plans to monitor all commodities classes, including digital assets.
The UK Financial Conduct Authority
The FCA’s Strategy 2022-2025 emphasizes its commitment to taking decisive action against market abuse. The regulator aims to reduce and prevent serious harm by scrutinizing new market participants and focusing on firms and sectors with the potential to create liability.
European Securities and Markets Authority
ESMA’s Strategy prioritizes enhanced leadership and cooperation to combat market abuse and promote effective and stable markets. They plan to develop tools for cross-border supervision to prevent supervisory arbitrage.
Canada’s New Self-Regulatory Organization
The New Self-Regulatory Organization of Canada (New SRO) emphasizes the need for robust monitoring of failed trades and policies on restricting short selling. The New SRO has adopted IIROC’s Universal Market Integrity Rules (UMIR), providing detailed requirements for financial institutions to prevent market abuse.
Australian Securities and Investments Commission
ASIC’s Enforcement Priorities for 2023 target misconduct involving high-risk products like crypto assets. They aim to enforce compliance with market integrity rules and enhance surveillance efforts.
The Monetary Authority of Singapore
MAS emphasizes the importance of broker engagement in detecting and addressing suspicious trading activities. The regulator plans to utilize augmented intelligence and data analytics to improve the detection of market abuse.
Hong Kong Securities and Futures Commission
The Hong Kong SFC enhanced its market surveillance systems to detect risks and abnormal price movements. In 2023, a new rule required intermediaries to assign a Broker-to-Client Assigned Number (BCAN) to direct clients, enhancing market surveillance and strengthening investor protection.
Finally, Eventus suggests that compliance professionals should continuously reassess compliance risks, future-proof with a long-term perspective, and utilize flexible technology guided by subject-matter experts. They should also invest in responsive software to avoid regulatory gaps. By staying ahead of regulatory requirements, firms can attract and retain skilled staff while safeguarding their reputation and long-term performance.
For more insights, download the full report here.
