Recently, I travelled to Japan to support our local team, and saw a clear appetite for news of developments in the European Union as well as interest in the latest surveillance technology.
Another key trend I noticed was that Market Abuse concerns seem to be fairly low key compared to what I had seen in other countries. In Japan, the Securities and Exchange Surveillance Commission (SESC) conducts market surveillance and investigates market misconduct and securities fraud. However, to date, disciplinary actions or criminal charges levelled by this regulator have not matched that of the EU or the US. Arguably, this might generate a certain message to its markets and financial institutions.
In this environment several attitudes can flourish:
- Compliance teams find it hard to gain support from leadership for extensive surveillance;
- Some financial institutions may continue with a “tick the box” or do only what is the letter of the law; and
- Financial crime could flourish undetected until an external event triggers a deep review e.g. LIBOR (illustrated by multi-million USD fines against a Japanese investment banking subsidiary).
“Financial instruments firms” in Japan can’t rely on reactive responses to market manipulation concerns or internal surveillance alerts. To enable true risk-based surveillance, a firm’s compliance program should apply surveillance based on a “heat map” analysis of trader and trading risks. This requires an evolving understanding of risk born from a deep understanding of both foreign and domestic regulations. Compliance surveillance should look forward to innovation and the ability to access “big data” if they are to proactively discover collusion or potential collusion as well as patterns of abuse.
As with US, EMEA or APAC, any regulator or investigating body often has the benefit of hindsight. This is a key message for all Japanese financial instruments firms. Do not leave it to the last-minute to implement effective surveillance. Fines, investigations, whistleblowing, sanctions, reputational damage have become “the new normal”. Compliance must embrace proactive best practices and avoid being reactive to regulators or market trends.
Firms should also adopt a flexible approach to compliance technology that covers both their current and future legal and regulatory needs across the three lines of defence. An effective, well-calibrated surveillance system that is used by trained and competent staff, covering all asset classes and instruments traded (both traded on and off a venue) will be important to meet regulatory expectations.
Back in 2015, the Japan Exchange Regulation (JPX-R) announced that it would “establish an International Surveillance Office (ISO) as a specialised unit to conduct market surveillance of cross-border transactions.” The JPX-R also said that its ISO would also study regulations and trends outside Japan regarding unfair trading.
Coupled with this direction and with so many orders coming from abroad, Japanese financial institutions need to be aware that there will be increased co-operation between local and global regulators to address market abuse concerns.
The ultimate message is this: be proactive and don’t wait for the regulator to focus on your market sector. The impact could be too great not be taken seriously.
Originally written by Mark Follows