Regulatory Roundup: Enforcement Actions, Traders on Trial, Market Abuse, Cryptocurrencies at Risk, and More

October 2018

The financial regulatory landscape is constantly changing. If you find it challenging to keep up with the inundation of daily news and regulatory changes, you’re not alone. NICE Actimize’s Trade Compliance Regulatory Roundup is designed to keep you informed about the constantly changing regulatory landscape including the latest enforcement actions. Here is a summary of the recent global industry news, fines and updates dominating the headlines.

In this issue:

  1. United States - U.S. Regulator Enforcement Actions Jump 25 Percent »
  2. United States - CFTC Orders Firm to Pay $50 Million Penalty for Aiding and Abetting Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates »
  3. United Kingdom - Currency ’Cartel’ Traders on Trial for Chats That Cost Banks Billions in Penalties »
  4. United Kingdom - FCA Market Watch No. 56 Released in September 2018 Raised Several Issues on Market Abuse »
  5. United Kingdom - A Large Investment Manager Fined £409,300 by the FCA for Failing to Adequately Monitor Market Abuse
  6. Singapore - US Commodity Futures Trading Commission and Monetary Authority of Singapore Sign Arrangement to Cooperate on FinTech Innovation »
  7. Australia - The Big Four Banks in Australia Came Under Fire by the Royal Commission for their Greed, Lack of Honesty and Misconduct »
  8. Crypto - Report says Cryptocurrency Exchanges at Risk of Manipulation »

1. United States - U.S. Regulator Enforcement Actions Jump 25 Percent

What’s New: The number of enforcement actions brought by the U.S. swaps regulator has jumped 25 percent in recent months, discounting fears the agency would go soft on the financial industry under the new administration. During the fiscal year which ran from October 2017 through September 2018, the CFTC filed 83 enforcement actions, which represents a 25 percent increase from each of the last three years of the previous administration.

How NICE Actimize can Help: NICE Actimize is one of the few Markets Surveillance providers that covers swaps. Leading firms can use NICE Actimize’s swaps analytics to detect over a dozen forms of market manipulation including price ramping, fictitious orders, quote stuffing and as of market trades.

2. United States - CFTC Orders Firm to Pay $50 Million Penalty for Aiding and Abetting Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates

What’s New: A leading brokerage service for interest rate derivatives, foreign exchange, and money markets, aided and abetted numerous attempts by several of its bank clients to manipulate the ISDAFIX benchmark (a leading global benchmark referenced in a range of interest rate products), requiring the brokerage service to pay a $50 million civil monetary penalty.

How NICE Actimize can Help: A large client used NICE Actimize’s Communications Surveillance and machine learning to detect FX benchmark manipulation by identifying behavior, either known or anomalous, during the FX Price Fixing Window. That firm monitored changes in trader behavior, such as the form of communication, frequency, and number of participants. Using our Communications Surveillance solution in a similar fashion may have helped the firm uncover the manipulation of the ISDAFIX benchmark.

3. United Kingdom - Currency ’Cartel’ Traders on Trial for Chats That Cost Banks Billions in Penalties

What’s New: The three British currency traders who were part of an exclusive online chat group referred to by members as "the cartel" went on trial recently for alleged market manipulation that has already cost global banks $14 billion in penalties. Prosecutors are expected to show the jury transcripts of the traders’ chats as evidence that traders shared information about client orders and coordinated euro-dollar trades to increase their own profits.

U.S. regulators released transcripts in 2014 which showed the traders used coded lingo and humor to boast about "whacking" and "teaming" the market and congratulated one another when their plans paid off. According to grand jury testimony, they used code names for their customers, such as: ""Big Boy" for China’s central bank, and "Nemesis" for South Korea’s central bank.

How NICE Actimize can Help: NICE Actimize could have helped these banks uncover the market abuse earlier, minimizing the impact on the firm. NICE Actimize Communications Surveillance automatically analyzes 100% of all voice and e-communications including chat. Machine learning models spotlight suspicious communications by identifying communication patterns that are out of the ordinary for an individual or their peer group, such as "whacking" and "double-teaming." Furthermore, by marrying the trade data with the related communications data, NICE Actimize’s Trade Reconstruction solution automatically ties together all available evidence into a complete picture of a transaction.

4. United Kingdom - FCA Market Watch No. 56 Released in September 2018 Raised Several Issues on Market Abuse

What’s New: On 24 September, the FCA published issue 56 of Market Watch, its newsletter on market conduct and transaction reporting. This issue includes particularly significant information on the FCA’s views, such as:

  1. Firms are over reliant on out of the box alert settings or using peers to validate their own settings;
  2. Fixed Income STOR submissions are too low; and
  3. The prevalence of questionable rationales for failing to meet MAR obligations.

The impact of these realizations is a reinforcement of already widely held principles. Best practices dictate that Firms should not base their alert calibration on out of the box settings or benchmark their settings against their peers. Each firm (and its client) are unique and relying on stock settings likely will not meet MiFID/MAR requirements. It is imperative that each firm’s surveillance procedures are appropriate and proportionate to the scale, size and nature of their business activity.

How NICE Actimize can Help: Clients using NICE Actimize’s on-premises or cloud-based Markets Surveillance Cloud (MSC) solution can configure alert thresholds to suit their unique business needs. Other Cloud-based Markets Surveillance solutions cannot do this. For example, using NICE Actimize’s Markets Surveillance Cloud (MSC) configurable rules engine firms can set alert thresholds based on in-house trading activity, significantly increasing regulatory compliance.

For example, a firm can set a Large Order Entry alert based on an instruments Annual Daily Volume (ADV) rather than using the same ADV for small and large cap instruments. In addition, firms can also create additional rules to filter alerts using Policy Manager.

5. United Kingdom - A Large Investment Manager Fined £409,300 by the FCA for Failing to Adequately Monitor Market Abuse

What’s New: A large investment manager was fined £409,300 by the FCA (reduced from £584,700 due to a 30% discount for early settlement) for failing to adequately monitor market abuse during the period from January 2013 to August 2015. The firm relied on their brokers to monitor for market abuse using manual processes, which were unsuitable to the growth in execution flow.

How NICE Actimize can Help: NICE Actimize provides robust Markets Surveillance across all asset classes with an emphasis on automation and adaptation. With services provided as an on premise as well as a cloud offering, NICE Actimize supports organizations looking for control as well as those looking for a quick turnkey deployment. Both solution options offer best in class analytics for insider trading, market manipulation and cross product/market manipulation, actions.

6. Singapore - US Commodity Futures Trading Commission and Monetary Authority of Singapore Sign Arrangement to Cooperate on FinTech Innovation

What’s New: The MAS (Monetary Authority of Singapore) and the US Commodity Futures Trading Commission have entered into an arrangement to foster greater cooperation in FinTech. The arrangement focuses on information sharing on FinTech market trends and developments. This includes sharing insights derived from each authority’s relevant FinTech sandbox, proofs of concept, and innovation competitions. The FinTech Arrangement also facilitates referrals of FinTech companies interested in entering the other’s market. This will help FinTech companies better understand and navigate the regulatory regime and capitalize on opportunities in each jurisdiction.

How NICE Actimize can Help: As leaders in the Compliance FinTech space, NICE Actimize is helping to shape the ongoing conversation around regulation globally. NICE Actimize subject matter experts routinely interact with regulators from the United States to Singapore to remain at the forefront of developments as they occur. Through increased cooperation and insight with regulators in both directions, NICE is leading the conversation around the tools and techniques of compliance today and in the future.

7. Australia - The Big Four Banks in Australia Came Under Fire by the Royal Commission for their Greed, Lack of Honesty and Misconduct

What’s New: The big four banks in Australia have come under fire from the Royal Commission for their greed, lack of honesty and misconduct. In an interim report by the Royal Commission, conduct by financial services entities "has brought public attention and condemnation." The report states, "too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?"

The report went on to say: "Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ’community benefit payment,’ but the amount was far less than the penalty that ASIC could properly have asked a court to impose."

How NICE Actimize can Help: Had these firms used the NICE Actimize’s Sales Practices and Suitability solution, they may have averted incalculable damage to their reputations, and saved countless clients. Leading wealth management firms use our Sales Practices and Suitability solution to help ensure their investment recommendations are suitable and their sale practices are legal – particularly for vulnerable clients such as senior citizens.

8. Crypto - Report says Cryptocurrency Exchanges at Risk of Manipulation

What’s New: A new report by the New York Attorney General’s office calls into question practices undertaken by crypto exchanges, noting that many exchanges have failed to undertake serious measures to monitor and stop manipulative trading. Some crypto exchanges also engage in overlapping lines of business that present serious conflicts of interest. The report states, "virtual currency platforms lack the necessary policies and procedures to ensure the fairness, integrity, and security of their exchanges."

How NICE Actimize can Help: NICE Actimize has pioneered surveillance and monitoring solutions for the most complex asset classes including Swaps, FX and Fixed Income. We’ve always innovated in lock step with the market. Cryptocurrency is the market’s latest innovation and, as always, NICE Actimize is partnering with financial services firms in this new area to secure their future safety and soundness

 

We hope you found this Regulatory Round-up helpful. Please feel free to reach out to us with any questions by emailing us at Dave Ackerman or Jason Meritt.