FCA outlines market abuse prevention best practice at CFD firms

Regulator’s granular observations useful to other market participants in order to ensure that their surveillance approach meets expectations.

The UK FCA has published Market Watch 73, focusing on market abuse relating to firms who offer contracts for difference (CFDs). These firms tend to be spread betting companies or brokers and are viewed as vulnerable to insider dealing because they can offer leveraged positions, with the main activity being speculative trading.

The FCA also notes some potential for manipulative activity in underlying securities, with profits actually derived from spread betting and CFDs.

Nine firms were reviewed by the regulator, with seven then subject to supervisory visits to review their controls.

While the overall findings were positive, with the FCA noting that all firms had effective surveillance in place, some room for improvement was noted regarding:

  • more thorough market abuse risk assessments;
  • a potential lack of oversight for manipulation in non-equity asset classes;
  • inadequate monitoring for unrealised profits;
  • front office staff training;
  • formalisation and documentation of the risk appetite framework.

In connection with market abuse risk assessments, the FCA pointed to the potential order-based manipulation for direct market access (DMA) clients, especially those trading in less liquid securities.

Also noted was the importance of independent oversight and quality assurance, which the regulator views as resulting in more effective surveillance outcomes.

The newsletter also offers the FCA’s observations on two specific types of market manipulation:

  • Narrowing the spread, a spoofing type tactic, which may be on the increase.
  • ‘Pump and dump’ type tactics involving the release of a blog or recommendation.

In connection with the latter the FCA advised firms to use all information available to them including IP addresses and advertising IDs.

Another key message delivered was the need to off-board repeat offenders, something that the FCA hinted may be easier where that decision rests with a compliance function independent of senior management.

GRIP view

  • It is interesting that spread betters are picked out for a Market Watch newsletter and it suggests that the FCA has substantiated concerns with these providers discharging their regulatory responsibilities. But it may simply be a reminder that they are subject to regulatory requirements too!
  • A number of prescriptive “observations” are noted, which market participants will need to incorporate into respective surveillance solutions.
  • The fact that there is room for improvement in SYSC to ensure that risks are managed effectively may lead to firms giving some consideration to more formalised surveillance oversight. Although it is not specifically mentioned in this newsletter, such oversight could extend to communications monitoring because the key risk being flagged is insider dealing.