Suspicious trade reporting rise disguises a need for culture change
The threat of regulatory spot checks has
doubled suspicious transactions reports to UK regulators, but more needs to be
done to tackle the root problem of market abuse.
Theo Hildyard, product manager, market
surveillance at Progress Software, believes the spot checks threat employed by
the UK’s Financial Services Authority (FSA) has been successful, but the industry
needs to do more to deal with the issue.
“The sheer scale of the industry and the
compliance issues around the London Interbank Offered Rate (LIBOR) and the J.P.
Morgan whale trading incident and similar cases is very great,” said Hildyard. “The
number of suspiscious transaction reports we’ve seen is a good thing, but the
FSA is trying to scare people into doing the right thing, It’s industry that
needs to do more,” Hildyard said.
Barclays was fined over US$450 million by
US and European regulators in June over its part in the manipulation of LIBOR –
a benchmark used to underpin US$300 trillion worth of financial instruments – with
several other banks also thought to be involved. In May, J.P. Morgan trader
Bruno Michel Iksil, also known as the London Whale, was responsible for US$2
billion in losses resulting from credit derivatives trades
In light of these incidents, Hildyard
believes a cultural shift needs to take place within trading firms to monitor
fraudulent trading, as the technology already exists to do so.
“We have the technology to analyse
variations of the trade cycle and brokers can see if their clients are trying
to launder money, or if there’s rogue trading going on, but we need to invest
more in technology,” he said.
In June it was reported that the FSA’s
market monitoring department would spot check a dozen of the 500 banks and
brokers most active in the UK, and approach firms with low suspicious
transaction reporting figures.
“I’m not sure there has been a sea-change,
but rather more of a reaction to the scare tactics employed by the FSA,” added
In addition to the UK’s own efforts, the
European Commission has taken steps to bolster rules on dealing with suspicious
trades via the Market Abuse Directive (MAD).
A revised version of the directive was
widened by European policy makers earlier this year to include order-to-trade
ratios and address high-frequency trading, and may also include criminal
proceedings for offenders, which Hildyard believes is a good move.
“The MAD directive was a very necessary
step and in its initial phases was very specific asset classes, which have been
extended, which is a good move.
“The regulator sets the rules and monitors
that the rules are being followed and they should be able to hold people to
account,” Hildyard said.
MAD is currently being reviewed by the
European Commission and Council of the European Union, ahead of its
introduction in 2014-15.