Latest Market Watch focuses on transaction reporting

FCA’s latest Market Watch focuses on market conduct and transaction reporting issues. It

  • follows up on previous editions, which looked at FCA’s conclusions from a series of supervisory visits on suspicious transaction reporting. FCA had been concerned about over-reliance on “out of the box” alert calibration and that surveillance was not very developed for some asset classes.  It has continued to look into these themes and still finds firms relying on out of the box and industry standard alert parameters. It advises firms that each firm is different and that relying on this creates risks to the independent assessment of a firm’s business and therefore may not meet MAR requirements. It also reminds firms that the list of various market abuse indicators in MAR is not exhaustive. Finally, it says that STOR submission across asset classes is still inconsistent and it would expect more reports than it is getting in some areas. It is concerned that firms are excusing their failings either by claiming they act as their peers do, or that new joiners do not feel responsible for their predecessors’ arrangements; and
  • looks at Payment for Order Flow – where a firm executing orders receives a payment from the originating client as well as the counterparty. This creates a conflict because it incentivises firms to execute the order with counterparties willing to pay the highest commissions. FCA is also concerned about the effects of this practice on competition, price formation and transparency, and had written a Dear CEO letter at the end of 2017, backed up with information in its current Business Plan, setting out its expectations, particularly in the context of MiFID 2. Before implementation of MiFID 2, FCA had found firms had stopped charging PFOF in all but ECP business, and now firms have also stopped doing so in all cases where they consider themselves to be acting in an agency-like capacity. FCA plans to stop outliers it may find, and may consider the need for retrospective action. FCA will now assess whether firms who are charging both sides in interdealer broking business, which firms do not consider involves agency, are applying consistent judgement that aligns with conflict rules. FCA has also found some questionable practices, including inaccurate characterisation of a relationship which in fact involves a PFOF arrangement, and use of overseas booking to enable charging of PFOF. FCA will continue with its programme of firm visits, analyse its findings and take any appropriate further action.