On September 3, the Financial Conduct Authority (FCA) published issue 49 of Market Watch, its newsletter on market conduct and transaction reporting issues. In it, the FCA sets out its findings following a thematic review it conducted into commodities trading. In the review, the FCA reviewed a sample of 12 brokers, interdealer brokers and commodities trading firms and their activities in the oil, energy, metals and soft commodities sectors, and assessed how robust their front office and market abuse controls were.
The FCA’s “key messages” are:
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The effectiveness of the controls, management and governance structures assessed varied widely. The FCA noted that the more positive practices were typically demonstrated by firms with cultures that fully recognized the potential risks from their front office activities.
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Many firms had not embedded the lessons learned from recent market abuse cases (such as LIBOR, forex and gold). In some firms, the FCA found complacency toward the risk of market abuse.
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Most firms had not carried out a risk assessment and could not demonstrate they had adequate monitoring and surveillance across the full range of market abuse risks to which they were exposed. In addition, many firms could not demonstrate effective procedures to identify suspicious transactions and escalate them to the FCA in the form of suspicious transactions reports.
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Although some firms had embedded risk, such as risk analysts and risk systems on the trading desk, few firms demonstrated intraday management information or risk monitoring.
In its final comments in Market Watch 49, the FCA commented that it will continue its supervisory work relating to commodities firms. The FCA noted that with Markets in Financial Instruments Directive (MiFID) II coming into force (January 3, 2017) and its own expanded powers under the Market Abuse Regulation, more commodities trading firms are likely to become subject to FCA regulation and—it should be inferred—both those firms and the existing regulated commodities trading firms should focus on the issues identified by the FCA.
Market Watch 49 is available here.
