Suspicious transaction and order reporting
Under Article 16 of MAR, market operators and investment firms operating a trading venue1, and any person professionally arranging or executing transactions, should have in place arrangements, procedures and systems for the detection and reporting of orders and transactions suspected of constituting insider dealing, market manipulation or attempted insider dealing or market manipulation. The obligations to detect and report market abuse are not limited to investment firms under MiFID; they extend to UCITS management companies, AIF managers and other firms professionally engaged in trading on own account (proprietary traders) such as energy trading companies.
1. Reporting obligations
Under the new regime, firms and trading venues must report suspicious "orders" (which include quotes and requests for quotes) in addition to transactions, as well as "attempted market abuse". The obligations are not territorially limited, and extend to orders and transactions in any financial instrument within scope of MAR, whether placed or executed on or outside a trading venue, and to the cancellation or modification of such orders.
In June 2016, the FCA issued guidance on submitting "Suspicious Transaction and Order Reports" via Connect.
2. Detection and surveillance systems
Firms will need to have in place systems capable of analysing every transaction and order, individually and comparatively, and which produces alerts for further analysis. The MAR implementing technical standards (2016/957) state that such processes are likely to require some level of automation, but that they must also ensure an appropriate level of human analysis.
The technical standards require firms to ensure that the systems are:
- appropriate and proportionate to the scale, size and nature of their business activity;
- regularly assessed, at least through an annually conducted audit and internal review, and updated when necessary; and
- clearly documented in writing, including any changes or updates to them, and that the documented information is maintained for a period of five years.
Firms are therefore expected to have adequate surveillance systems in place which use both technology and people where appropriate. It is possible to delegate the task review and analysis of communications, subject to the usual caveats regarding ongoing oversight, evaluation and access, but responsibility remains with the firm.
Few firms are likely to have fully MAR-compliant overarching systems, so they will be seeking to leverage the systems they already have, as well as considering new surveillance products with a view to combining existing trade surveillance alerting with communications data. Some practical steps may include the following:
- Consider targeted surveillance based, for example, on key words, specific instruments, staff and ongoing transaction timings, with heightened surveillance where appropriate
- Including post-trade surveillance to highlight and properly investigate potentially suspicious trades
- For automated trade monitoring systems, ensure that parameters are correctly set and system correctly calibrated to MAR requirements
- Develop tactical and strategic approaches to the monitoring of unexecuted orders placed through phone calls, chats, emails, etc.
- Ensure that all staff, in particular front office staff, are well-trained to identify behaviours, orders and transactions which could constitute actual or attempted market abuse.
1 MAR requires that the arrangements, systems and procedures of operators of trading venues (including market operators) be aimed at preventing market abuse (or attempted market abuse), as well as detecting and reporting it.