Global Regulatory Brief: Trading and markets, June edition
The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Trading and markets regulatory developments
Regulatory authorities continue to advance initiatives to improve the efficiency and sophistication of global securities markets. From market abuse guidance in the UK to listing reforms in South Africa, the following global developments in trading and markets from the past month stand out.
- UK: FCA publishes observations and guidance on market abuse surveillance
- US: CFTC orders firm to pay $200m for supervision failures
- EU: ESMA consults on technical rules to implement the new MiFIR-D framework
- US: SEC adopts rule amendments to enhance protection of customer information
- Dubai: Financial Market launches new private markets platform
- South Africa: South Africa proposes amendments to Listing Requirements to introduce market segmentation
- US: SEC, FinCEN propose customer identification program requirements for registered investment advisers and exempt reporting advisers
FCA publishes observations and guidance on market abuse surveillance
The UK Financial Conduct Authority (FCA) published observations relating to failures of market abuse surveillance and firms’ testing of front-running surveillance models.
In summary: The FCA is aware of problems with surveillance alerts not working as intended due to faulty implementation and bugs being inadvertently introduced as firms make changes.
- As a result, not all the required data for successful monitoring has been ingested
- These failures can lead to scenarios where an entire section of a firm’s activity, such as a segment of business sent to a particular exchange, might not be monitored
- Alert scenarios can become ineffective as a result of inadequate testing before and after implementation
Examples: The FCA has given some examples of malfunctions they have observed to help firms understand the types of issue they may face.
- Example 1: A firm did not undertake the necessary testing on a new third-party automated surveillance system and therefore did not notice that the news feed had not been activated. As news is necessary for the system’s insider dealing scenario model to operate, the firm only became aware of the failure after the FCA enquired about potentially suspicious trading
- Example 2: A fault in a firm’s in-house surveillance model meant that surveillance alerts were not being generated for less liquid instruments
- Example 3: A firm connected some clients directly to certain trading venues and this activity was captured using a trading private order feed (POF). The firm mistakenly believed that its POF trading activity was being captured and monitored for market abuse
Peer review: Following an assessment of how investment firms review their automated surveillance models, the FCA encourages firms to consider, among other things, that all relevant trade and order data is being captured and that governance arrangements around model testing are sufficiently robust.
- The FCA has observed that not all firms have allocated adequate focus and resource to governance arrangements
- With technological developments – such as AI – set to reshape surveillance functions, the FCA underlines the need for governance that keeps pace and remains effective
Closely related: The FCA and the UK Prudential Regulation Authority (PRA) imposed financial penalties worth a combined £61.6 million on Citigroup Global Markets Limited (CGML) for failures in the firm’s systems and controls.
- The investigations uncovered failings in control systems that led to $1.4 billion of equities being sold in European markets when they should not have been in May 2022
- An inputting error while entering the basket in an order management system resulted in a trading algorithm selling a total $1.4 billion of equities across European exchanges, before the trader canceled the order
- This resulted in a material short-term drop in some European indices which lasted a few minutes
- The authorities found that some primary controls were absent or deficient and that the firm’s real-time monitoring was ineffective, which meant that it was too slow to escalate internal alerts about the erroneous trades
CFTC orders firm to pay $200 million for supervision failures
The Commodity Futures Trading Commission (CFTC) settled charges against a registered futures commission merchant and swap dealer for failing to capture billions of orders in its surveillance systems.
In more detail: The Commission’s order requires the firm to pay a $200 million civil monetary penalty (CMP), cease and desist from further violations of the CFTC’s supervision requirements, and comply with conditions and undertakings specified in the order.
The CMP will be offset by a total of $100 million of any payment made by the firm pursuant to the resolution of similar orders with the Office of the Comptroller of the Currency and Board of Governors of the Federal Reserve System.
Background: According to the order, in 2021, the firm discovered its surveillance of trading on multiple venues and trading systems was not operating correctly, resulting in gaps in the firm’s trade surveillance on these venues.
- These gaps resulted from a failure to configure certain data feeds to ensure complete trade and order data were being ingested by surveillance tools
- Specifically, the firm failed to ingest into its surveillance systems — and thus failed to surveil — billions of order messages from 2014 through 2021, which, according to the firm, largely consisted of sponsored access trading activity for three significant algorithmic trading firms
- The firm stated the surveillance gaps were fully remediated by 2023
ESMA consult on technical rules to implement the new MiFIR-D framework
The European Securities and Markets Authority (ESMA) has launched the first batch of public consultations on the draft rules implementing the new Markets in Financial Instruments Regulation (MiFIR 2) and Directive (MiFID 3), which cover key areas including cost of market data, non-equity transparency and the fixed income consolidated tape provider (CTP).
- Non-equity transparency: ESMA is seeking input on pre-and post-trade transparency requirements for non-equity instruments (bonds, structured finance products and emissions and allowances) that seek to balance real-time transparency and the ability to defer publication (RTS 2)
- Cost of market data: ESMA is seeking input on the obligation to make pre- and post-trade data available on a reasonable commercial basis, which is intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner
- Reference data under RTS 23: ESMA is seeking input on the obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes (RTS 23)
- Consolidated Tape Providers and other data reporting service providers: ESMA is seeking input on rules on input and output data, covering reporting instructions and data quality requirements for all CTPs and data contributors; the methodology for the equity CTP to redistribute revenue to data contributors and the criteria to suspend such redistribution; Clock synchronization; authorisation and organizational requirements for Authorized Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs); New rules for the authorisation of CTPs; and initial reflections on the assessment of CTP applicants
- Position management controls and position reporting: ESMA is consulting on changes to the technical standards (RTS) on position management controls, the Implementing Technical Standards (ITS) on position reporting, and on position reporting in Commission Delegated Regulation (EU)
Next steps: ESMA will consider comments received by August 28, 2024 and will then publish a final report and submit the draft technical standards to the European Commission by the end of Q4-2024.
SEC adopts rule amendments to regulation S-P to enhance protection of customer information
The Securities and Exchange Commission (SEC) adopted amendments to Regulation S-P to modernize and enhance the rules that govern the treatment of consumers’ nonpublic personal information by certain financial institutions.
The amendments require broker-dealers (including funding portals), investment companies, registered investment advisers, and transfer agents (collectively, “covered institutions”) to:
- Develop, implement and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to and recover from unauthorized access to or use of customer information
- Develop procedures for, with certain limited exceptions, to provide notice to individuals whose sensitive customer information was or is reasonably likely to have been accessed or used without authorization
- To provide notice as soon as practicable, but not later than 30 days, after becoming aware that an incident involving unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred. The notice must include details about the incident, the breached data, and how affected individuals can respond to the breach to protect themselves
Implementation timeline: The amendments will become effective 60 days after publication in the Federal Register and larger entities will have 18 months after the date of publication in the Federal Register to comply with the amendments.
Dubai Financial Market launches new private markets platform
The Dubai Financial Market (DFM) announced an approach into private markets with a new platform – ARENA – that offers private alternatives to IPOs for family businesses, growth companies, and private companies, and aims to make it easier for such companies to raise private loans.
Key features: DFM Arena aims to provide an opportunity for:
- Companies to access capital through diverse assets including equity and debt with plans to introduce additional asset classes
- Venture capital firms to expand their investor base by selling private market shares, and thereby establishing a previously unavailable liquidity pool
- Privately listed companies on ARENA to have the option of limiting investor’s access to institutional investors, employees-only, or family and founding members, offering a unique pre-IPO listing option
South Africa proposes amendments to Listing Requirements to introduce market segmentation
The Johannesburg Stock Exchange (JSE) announced proposed amendments to its Listings Requirements to introduce the Market Segmentation Project aimed at the smaller issuers on the Main Board of the exchange.
In summary: This initiative is part of a broader set of reforms designed to simplify the Listings Requirements through repositioning the JSE’s Main Board into two distinct segments.
Key features: The consultation seeks feedback on the key following items:
- Introducing more flexibility through a general authority to issue shares for cash without shareholders’ approval, which may serve as a catalyst for capital raising, subject to a prescribed limit and other safeguards like pricing parameters
- Removing fairness opinions for related party transactions/corporate actions with more emphasis being placed on shareholders’ approval, disclosure and the corporate governance processes applied
- Removing of the preparation of pro forma financial information with more emphasis being placed on a detailed narrative explaining the impact on the transaction/corporate action on the financial statements
- Introducing larger percentage ratios for category one transactions
- Introducing larger percentage ratios for small related-party transactions with more emphasis being placed on disclosure and the corporate governance processes applied
- Introducing more flexibility to undertake repurchases of securities
- Introducing more flexibility on financial reporting by removing the preparation of either (i) condensed financial statements or (ii) annual financial statements/summary financial statements within three months. Listed companies will only be required to prepare an annual report within four months
Looking ahead: Following the closure of the comment period, the final amendments are subject to approval by the Financial Sector Conduct Authority (FSCA).
SEC, FinCEN propose customer identification program requirements
The SEC and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) jointly proposed a new rule that would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document and maintain written customer identification programs (CIPs).
Context: The proposal is designed to prevent illicit finance activity involving the customers of investment advisers by strengthening the anti-money laundering and countering the financing of terrorism (AML/CFT) framework for the investment adviser sector.
- The proposal is generally consistent with the CIP requirements for other financial institutions, such as brokers or dealers in securities and mutual funds
- A fact sheet on the Notice of Proposed Rulemaking is available
In more detail: Under this proposal, RIAs and ERAs would be required to:
- Implement reasonable procedures to identify and verify the identity of their customers, among other requirements, in order to form a reasonable belief that RIAs and ERAs know the true identity of their customers
- Implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable and maintaining records of the information used to verify a customer’s identity, among other requirements
Looking ahead: The public comment period will remain open for 60 days after publication of the proposing release in the Federal Register.
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