The FCA’s Market Watch 69 newsletter presents a wide-ranging discussion about
firms’ arrangements for market abuse surveillance. The discussion is based on the
FCA’s observations of small and medium-sized firms so is likely to be most relevant to the buy-side and smaller sell-side. FCA’s indication of best practice: Whilst the discussion examines the various approaches firms take, the FCA indicates the following best practices:
2. Order and trade surveillance:
5. Front office
6. Countering the risk of market abuse-related Financial Crime (SYSC 6.1.1R)
TradingHub’s view as a 3rd party trade surveillance SaaS provider:
The FCA stresses the need for firms to consider the individual characteristics of different asset classes and instruments before calibrating alert scenarios. This approach ensures effective monitoring whilst minimising false positives. However,
we would point out that the work required to tailor alert logic to potentially every instrument and scenario may be too onerous for the buy-side and smaller sell-side given their limited resources. In addition, cross-product abuse surveillance introduces further instrument-specific thresholds which complicates matters further.
The FCA then makes mention of progress in third-party systems “in areas such as tailored calibration”. This refers to systems capable of self-calibration at the level of individual instruments. Such approaches eliminate the burdensome need to create and maintain substantial numbers of custom parameters, including those associated with cross-product abuse monitoring.
We strongly encourage firms to explore the possibilities afforded by tailored calibration. However, we agree with the FCA that users of vendor-supplied systems must understand how alert scenarios work in order to identify gaps and weaknesses. This is particularly important for systems offering self-calibration owing to the sophisticated models they employ in their analysis. In addition, such tools very often require more extensive training to achieve the required level of
TradingHub’s MAST product is a model-based trade surveillance tool with self-calibration. For our customers, we provide a wide range of resources to help our users reach a strong level of understanding, including:
Furthermore, we offer training and support both during and after implementation to ensure full understanding of MAST’s approach and corresponding best practice.