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FCA Market Watch 73: The FCA's review of market abuse risks in CFD firms

Posted on 30 May 2023

On 26 April 2023 the Financial Conduct Authority ('FCA') published their latest Market Watch update, focussing on their market abuse peer review into firms that offer Contracts for Difference ('CFDs') and spread bets ('CFD providers').

CFDs and spread bets are particularly vulnerable to being used for insider dealing due to their speculative and leveraged nature, and the FCA notes that they are a major source of Suspicious Transaction and Order reports ('STORs'). The FCA have observed a potential increase in a type of manipulative behaviour where spread bets and CFDs are being used to realise profits following manipulative practices in the underlying market via other firms.

The FCA reviewed nine firms and asked them for information on their business models, market abuse risks and arrangements for detecting and reporting market abuse, including policies and procedures, risk assessments and relevant management information. They also undertook supervisory visits to seven of the nine firms to look at their risks and controls more closely.

The FCA's review aimed to improve their understanding of CFD providers' arrangements to identify and report potential market abuse and raise standards.

Key Findings

Overall, the FCA's findings were largely positive and all the firms they reviewed had surveillance in place to detect insider dealing, most of which were considered to be effective. They did, however, observe some weaknesses including a lack of consideration of market abuse risks in non-equity asset classes and market manipulation, leading to gaps in surveillance.

The FCA also noted the importance of compliance with SYSC 6.1.1R which requires firms to establish, implement and maintain adequate policies and procedures sufficient to ensure compliance with regulatory obligations and for countering the risk that the firm might be used to further financial crime. Whilst the FCA found significant improvement from firms in meeting this obligation, they noted that "many firms lack a formally documented framework".

The FCA made the followings observations on areas requiring improvement by firms:

  1. Market Abuse Risks
    Firms need to understand how they could facilitate market abuse and undertaking a proper risk assessment is an effective tool to achieve this. It enables a firm to document all the market abuse risks that apply to its business and consider what monitoring it needs to detect them, in a structured and comprehensive way. The FCA notes that a general assessment of market abuse policies and procedures does not achieve this and firms which had considered the entire business were more effective in identifying applicable risks.
  2. Market Abuse Surveillance Responsibilities
    The FCA noted that all firms reviewed had policies and procedures setting out roles and responsibilities for market abuse surveillance and for investigating and escalating alerts from their surveillance systems. In some firms, however, responsibility for surveillance rested solely with the front office, leading to a situation where front office were effectively handling surveillance of their own activities. The FCA noted that for market abuse surveillance to be effective it should sit with an independent Compliance function. For smaller firms where resource may be limited, responsibility for surveillance may rest with teams or individuals outside of Compliance. Where this is the case, alerts handling should, at the minimum, be subject to independent oversight and quality assurance to mitigate the risk of potential conflict.
  3. Surveillance Systems
    Most firms reviewed demonstrated their insider dealing alerts were largely effective. One area of concern for the FCA, however, was that some firms did not monitor for unrealised profits, either specifically or by capturing them via discrete alerts, such as news or price movements. In addition, the FCA found that most firms did not have effective surveillance for non-equity asset classes and one firm relied on their trading desks to detect market manipulation with little or no independent oversight from compliance.
  4. Market Manipulation Behaviours – Narrowing the Spread
    The FCA highlighted that 'narrowing the spread', a type of market manipulation which aims to influence the prices of spread bets or CFDs by narrowing the spread in the underlying market, is on the increase. CFD providers are often at the centre of this activity and so are key to identifying and reporting it. Although relying on trading desks to detect this behaviour may have proved successful in some instances, the FCA suggests that firms should also consider whether surveillance alerts would more effectively and consistently identify it.
  5. Surveillance Alert Investigations
    When reviewing alerts for insider dealing, some firms placed significant weight on factors such as financial blog articles and bulletin boards, analyst recommendations and stock sentiment, without considering the client’s trading history. The FCA state that a client’s trading history is also an important factor to consider to sufficiently assess reasonable suspicion of market abuse. They recommend that firms should use all relevant information available to them as those that did were more effective in identifying suspicious clients and connections.
  6. Front Office and the Tipping off Risk
    The FCA found that Compliance was generally reluctant to provide feedback to front office staff on surveillance matters due to concern about tipping off. The FCA state that firms need to strike the right balance when engaging with front office on surveillance matters but this should not prevent Compliance challenging and educating front office staff where the front office has not identified or escalated suspicions about a client. Relevant Compliance policies should be clear and appropriate action taken if they are breached.
  7. Countering the risk of market abuse-related Financial Crime (SYSC 6.1.1R)
    The FCA were encouraged that all firms they visited demonstrated they were acting in accordance with their SYSC 6.1.1R obligations as they apply to market abuse. Whilst all firms were able to discuss their actions, some had not created a formal risk appetite framework to describe what actions to take, and under which circumstances. The FCA emphasised that there is no one size fits all solution and any SYSC framework should be proportionate to the nature of the firm's business. Firms are advised to regularly review their SYSC arrangements to ensure they remain effective and fit for purpose as their businesses and client bases develop.


Whilst the FCA's findings were largely positive, the FCA did identify weaknesses, and CFD providers should carefully consider the points made by the FCA in Market Watch 73. Firms should take steps to ensure that their systems and procedures for detecting and reporting potential market abuse are appropriate and proportionate to the scale, size and nature of their business activities. Firms should also ensure they have effective policies and procedures to counter the risk they are used to further market abuse-related financial crime as per SYSC 6.1.1R.

It is interesting to note the FCA 's emphasis on the lack of consideration of market abuse risk in non-equity classes. This is all of a piece with the FCA's Business Plan for the year that highlights their intention to create a non-equity manipulation team and to significantly improve their capabilities to detect and prosecute fixed income and commodities market manipulation.

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