In the September 2015 edition of Market Watch, the FCA published the findings of the Commodities Trading Thematic Review. It reviewed 12 firms, including brokers, interdealer brokers and commodities trading firms.
The review focused on firms trading and broking across the oil, energy, metals and soft commodities sectors. Whilst the review included governance arrangements, and culture and processes, what was most interesting in terms of possible enforcement action on the horizon work were its findings in relation to market abuse controls. These can be summarised as:
- A concern from the FCA that some firms believed that commodity markets were too deep, too liquid and that there were too many participants for the markets to be manipulated. The FCA was critical of this thinking. It also observed that the views were surprising in light of recent cases of manipulation in other deep and liquid markets, as well as historical market abuse cases in the commodities markets.
- At the majority of firms, trader/broker understanding of their responsibilities on use of inside and market sensitive information was poor.
- Awareness of market abuse risk was also poor.
- Firms that did not fully recognise the risks of market abuse were more likely to employ inappropriate surveillance.
- Most firms' communications surveillance captured Instant Messenger and recorded lines, but did not monitor them on a systematic basis.
- Many firms had inadequate STR procedures. The number of STR submissions within the commodity sector was low in comparison to other asset classes, which the FCA thought could indicate that potential suspicious transactions are not being appropriately reported. It is interesting to note that one of the factors which demonstrated to the FCA that awareness of market abuse was poor was the ignorance there was by firms of their obligations in relation to the STR regime.
There are clearly some real shortcomings identified. The FCA is keen on its messages. In light of its findings at some of the firms, its messages in the review, and also the recommendations in FEMR for raising standards including in commodities markets (see elsewhere in this issue "The Fair and Effective Markets Review Report"), it may not be too long before enforcement action is seen in this area.
You can review the September 2015 edition of Market Watch here.
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