FCA highlights lack of formal market abuse controls among some CFD providers

FCA highlights lack of formal market abuse controls and surveillance among CFD providers image

What has the Financial Conduct Authority (FCA) said?

In Market Watch 73, the FCA sets out its observations from its recent market abuse peer review into Contracts for Difference (CFD) providers. While the report was largely positive it did highlight some areas of weakness. In this blog we summarise some of its key findings and why the findings matter.

The FCA observes that the surveillance of insider dealing is soundly covered compared to market manipulation, albeit further improvements could be made. The main concerns relate to firms not considering unrealised profits when determining whether insider dealing has potentially taken place.

In comparison, it finds that the monitoring for market manipulation is weaker. Cross product manipulation was flagged as possibly on the increase, for example manipulating the underlying asset to profit from a related CFD or spread bet.

‘Narrowing the spread’ – a key area of weakness

Although most firms were aware of ‘narrowing the spread’ behaviour, with some submitting suspicious transaction and order reports (STORs), no firms had listed this type of abuse in their risk assessments or had any ‘compliance-based’ surveillance to detect it. This behaviour is harder to detect when manipulation is conducted across multiple providers or via a dealing ring.  

Two things can help here: communications surveillance tools can help identify different parties acting in concert and across markets. Secondly, the FCA can access MiFIR transaction reporting data to help detect such behaviour across firms. They also receive order level data covering the main UK equity markets.

Lack of surveillance for non-equity asset classes

Market Watch 73 also reports that most firms do not have effective surveillance for non-equity asset classes. Although a common and recurring theme over the years, firms still need to consider if insider dealing or market manipulation has occurred in retail derivatives referencing any asset class, not just equities.

A tailored Market Abuse Risk Assessment (MARA) is key to helping identify market manipulation

Some organisations lack a formal market abuse controls framework. Firms that undertake a Market Abuse Risk Assessment (MARA) can demonstrate that they are considering relevant market abuse risks. Furthermore, a tailored MARA is much more effective at identifying such risks.

When conducting a MARA and building a surveillance framework, it’s important to consider:

  • All asset classes
  • Cross product and cross market manipulation
  • Trading activity in its historical context
  • Unrealised as well as realised profits
  • The different ways transactions are executed
  • How pre-trade activity (Orders, RFQs, IOIs) can manipulate prices and mislead market participants
  • The level of liquidity and pre and post trade transparency at instrument and market level
  • How electronic and voice communications are monitored
  • Keeping your MARA up to date!
  • Read the full Market Watch 73 on the FCA’s website
  • To learn more about Kaizen’s trade and communications surveillance solutions through our acquisition of Red Deer, please contact us.