The FCA has released its latest newsletter in the series on market conduct and transaction reporting issues (Market Watch 79).
This issue covers the highly complex matter of failure of market abuse surveillance systems caused by issues with factors such as data and automated alert logic. It also covers faults found in their recent peer review of firms’ testing of front-running surveillance models.
ISDA has published a white paper setting out its guidance for industry stakeholders, regulators and technology providers who are looking to harness the power of generative artificial intelligence, or 'genAI' as it’s known, in the over- the-counter (OTC) derivatives market.
Those not familiar with the term will be asking ‘what is genAI?’.
GenAI is a novel set of algorithms that can automatically generate new content by synthesising existing content.
As part of the ongoing fallout of the collapse of Archegos Capital Management in 2021 the PRA has conducted a thematic review of private equity financing.
The PRA has published its findings in a ‘Dear Chief Risk Officer’ letter, which has been sent to all relevant CRO’s and backed up by a speech by Rebecca Jackson, Executive Director for the PRA’s Authorisations, RegTech, and International Supervision Directorate (ARTIS).
In contrast to the EU, crypto assets have had a tougher time gaining acceptance in both the U.S. and the U.K. but there is now a distinct ray of light at the end of the tunnel in both countries.
Until January of this year the U.S. Securities and Exchange Commission (‘SEC’) and, in particular, Gary Gensler, its chair, had adopted a ‘just say no to crypto’ approach to crypto assets, deeming virtually every American crypto business activity conducted by the platforms as requiring registration with the SEC as a ‘security’ which would require them to follow the SEC’s complex security regulations.
Following its initial observations of February last year, the FCA has published a concluding report, on ICARA (Internal Capital Adequacy Risk Assessment) and IFPR (the Investment Firms Prudential Regime) reporting, bringing to a close the FCA’s multi-firm review.
Their review highlighted that, despite making progress, there are still areas for improvement around group ICARA processes, internal intervention points, wind-down assessments liquidity assessments, operational risk capital assessments and regulatory data submissions.
CumEx is a complex subject and the variety of CumEx variants that were seemingly employed by traders can be bemusing. Below we outline some schemes which have appeared in the public domain.
It should be noted that there were also additional mechanisms seemingly adopted to further disguise the nature of the activity.
The fallout from the collapse of Archegos Capital in 2021 and the Liability Driven Investment (‘LDI’) crisis of last autumn rolls on with much of the recent focus on remedial work around the LDI liquidity problems.
In a recent ‘Dear Chief Risk Officer’ (‘CRO’) letter from the PRA to firms involved in the PRA’s planned thematic review of firms’ matched book repo businesses, the PRA explained that they had widened the review to cover lessons learned from the large fluctuations seen in gilt prices in September and October 2022, which particularly impacted LDI firms.
In its latest ‘Dear CEO letter’, the FCA has written to wholesale banks setting out their supervisory strategy for the next two years based on recent market events.
It includes information on their internal restructuring, which creates a ‘Sell-Side Directorate’ where the Wholesale Banks Department now sits alongside the supervision of market intermediaries and an area that analyses market interactions. …
In a co-ordinated global regulatory action, which included the Swiss Financial Market Supervisory Authority (FINMA), the U.S. Federal Reserve and the U.K.’s Prudential Regulation Authority (PRA), Credit Suisse, now a subsidiary of UBS, has been fined a total of $388 million over their dealings with the collapsed firm Archegos Capital Management.
For the PRA’s part their proportion of the fine was £87 million, the largest ever imposed on a firm, and the first time that its enforcement investigation team had established breaches of four of its eight Fundamental Rules and Principles for Businesses.
There have recently been a number of high profile “Spoofing” cases in the US, resulting in several convictions of traders. Spoofing is a form of market abuse which can sometimes be subtle, and hard to distinguish from “normal trading”, and is therefore challenging to monitor.
However, there is a clear message from authorities that spoofing is market abuse and will not be tolerated - so the responsibility falls firmly on senior management to ensure that the level and quality of trader surveillance is adequately robust to prevent spoofing. …
As international legislators and policy makers rush to catch up with the exponential growth of the cryptoasset market the PRA is applying the existing regulatory framework to control their expanding use, while the FCA is focusing on the management of growing risks in the areas of financial crime and custody.
Following global losses of over $10 billion suffered through the failure of Archegos Capital Management earlier this year, the PRA and the FCA have engaged in a multinational review and assessment of the losses conducted by the major global regulators, particularly focusing on counterparty risk management.
The UK response - under the umbrella of the Bank of England - was a ‘Dear CEO’lettersent in December to selected firms, operating in this space, requiring review and assessment of their equity financing business .
In its latest issue of “Market Watch” the FCA has expressed further concerns that, although it is five years since the introduction of the Market Abuse Regulation (MAR), firms are still not keeping up with market developments and thus failing to identify instances of potential market abuse.
The Code had been developed to restore confidence and establish ‘best practice’in FX markets following public scandals about market manipulation. However, the Code still allowed the continuation of the controversial practice of ‘last look’.
In Series 2 we looked at ETF’s as an alternative way to access shares in order to effect a Cum-Ex strategy. In this instalment we move on to consider the use of Physically Settled Futures in these structures, why this alternative was required and the differences in execution compared to simply using Stock.
As our followers on LinkedIn will know, one of FMCR’s areas of expertise is on the complex business of what has become known as ‘Cum-Ex’ trading. FMCR provides technical knowledge and experience on Cum-Ex and Cum-Cum, including forensic data analysis and conduct reviews.
In the last Series, we covered some of the basics of Cum-Ex trading – how the trade works, what factors can create a duplication of withholding tax reclaims and what a short seller is.
In the next few series we will be going over products alternative to shares that could be used in Cum-Ex. In Series 2 we look at ETFs.
The FCA has issued a Warning Notice regarding alleged spoofing-type activities at a bank in 2016. There have also recently been a number of high profile “Spoofing” cases in the US, resulting in several convictions of traders.
Spoofing is a form of market abuse which can sometimes be subtle, and hard to distinguish from “normal” trading”, and is therefore challenging to monitor.
Sustainability-linked derivatives (SLD) are a niche and nascent but rapidly growing market. The first SLD was executed in August 2019 and since then a variety of SLD’s have been developed across Europe and more recently in Asia and the US.
