Market Abuse – the Importance of a MARA

Introduction

The FCA and other regulators have recently made a number of public statements about their approach to market abuse. This article looks at some themes coming out of those statements, and what we can learn from them, particularly as they apply to metals. It focuses in particular on the “Market Abuse Risk Assessment” or MARA, which is the document which sits at the heart of a firm’s approach to market abuse.

Summary

The prevention of market abuse is a core focus for the FCA, and it views firms as a vital first line of defence. Equally, the FCA expects trading venues to devote significant resources to preventing market abuse, and to ensure that its participants do the same. We have seen a number of “systems and controls” style investigations and enforcement actions in recent years, both from the FCA and other national competent authorities,

and from trading venues. The regulators expect firms to have the right culture, and for that culture to drive a systematic approach to spotting, reporting and reducing the risk of market abuse. The MARA is an essential tool in a firm’s armoury. A good MARA will be designed specifically for the risks the firm faces, and will be updated regularly. The MARA will drive the firms’ approach to order and trade surveillance – determining the alert scenarios and how they are calibrated. It will also drive the policies and procedures which a firm has. Get the MARA wrong and this is likely to lead to an inadequate approach: this in turn could lead to an investigation and expensive fines.

Background

The FCA published its 22-25 strategy document last year. As with previous communications from the FCA, there is an emphasis on firm culture and safeguards to identify, monitor and detect market abuse. What is notable from the strategy document was the emphasis on the FCA’s own enhancement of its detection capabilities. The FCA is investing heavily in upgrading its market surveillance systems to keep pace with evolving market abuse techniques and “big data”. This will allow near real-time monitoring and improving data capabilities so the FCA can better monitor a range of asset classes. The metals markets (both on exchange and OTC) are currently front-and-centre of the FCA’s thinking, following the nickel issues of last year: metals will be a significant focus of the upgraded surveillance capabilities.

The MARA

Recent FCA newsletters and exchange enforcement actions have also reflected the regulator’s focus on market abuse, including the importance of a market abuse risk assessment. A firm must have effective arrangements, systems and procedures in place to detect and report suspicious activity, which should be appropriate and proportionate to the scale, size and nature of their business activities. Firms must consider different types of market abuse, the different areas of business in which they operate, how that business is undertaken, and the different asset classes and instruments traded, so that they can adequately identify market abuse risks and align their monitoring programme to them to ensure effective surveillance. Problems can arise where (i) firms whose business involves activity across a range of asset classes fail to distinguish between them when assessing for risk; (ii) firms do not consider how different types of business, execution activity (e.g. electronic vs voice-broked) or platform (e.g. on-exchange vs OTC) might present different market abuse risks, and (iii) firms discount the risks in certain business areas because of low trading volumes, without considering the inherent risks. If a firm trades metals on multiple venues, and also OTC, for example, has the firm considered the risk of cross-venue abuse? What are the risks arising from knowledge about stock movements in the physical world being used to nefarious benefit on a lit venue? Firms must also review and update their MARA as necessary to ensure they remain effective in the context of risks arising from changes in their business.

The MARA drives the Policies & Procedures

A carefully-considered MARA will help to ensure that the rest of a firm’s policies are adequate. Another core pillar of market abuse prevention is having clear, detailed and up-to-date policies and procedures. These will provide a helpful reference point for staff and assist with work in areas such as alert review and escalation. Beware policies which are vague or have limited detail, such as directing analysts reviewing surveillance alerts to look for signs of market abuse, but with no guidance on what these signs might be, or what materials / information to use or consider. This may lead to alerts not firing, or being inappropriately closed rather than escalated, or a firm failing to ensure a consistent approach.

Getting it wrong

Failure to have an adequate MARA or other documentation can be a very costly business. As has been noted before, the cost of compliance is far less expensive than the cost of not complying. The FCA published details of a number of enforcement actions closed in 2022 where systems and controls failings, including an inadequate MARA, were relevant (see for example the penalties levied against broker firms on 4th October 2022 for £531,600 and on 8 December 2022 for £4,775,200). The FCA also has tools such as the s.166 “skilled person” review, where the cost of compliance can be very high, in terms of (i) the fees of the skilled person, (ii) dealing with the review itself, and (iii) the remediation work after the findings. Equally, the London Metal Exchange announced fines of member firms of £90,000 on 7 December 2022, and of £175,000 on 8 July 2022. Both of these fines involved the member firm failing to organise and control its internal affairs in a responsible and effective manner, with appropriate and adequate risk management systems, including a failure to have adequate risk assessment arrangements.

How can Cambitas help?

The director of Cambitas, Tom Hine, is (amongst other things) a former Head of Enforcement at the London Metal Exchange and an expert in commodities regulation. Tom can undertake reviews of firms’ MARAs and other documentation to help firms get their approach right. Such a review, undertaken by an expert in the field, would help you to design controls which are appropriately calibrated for the specific risks you face for example in metals and other commodities. It may save you a fortune, in time and money. If this is something which would benefit you, please contact Tom at tom.hine@cambitas.com.