The Summer of Financial Regulation in Singapore
It has been an unusually busy summer in Singapore. Just a month ago, the Monetary Authority of Singapore (MAS) released a consultation paper highlighting new requirements to protect against market abuse and a trade surveillance best practice guide jointly published with the Singapore Exchange (SGX). Intrinsically linked, these documents provide guidelines to help firms prevent market abuse, including market manipulation and insider training, while also promoting a fair, orderly and transparent market. It’s clear these actions follow in the footsteps of other global regulations. But what impact do they have on the broader surveillance landscape?
Understanding the MAS Approach
MAS’ two-step approach – (first, laying out new market abuse prevention requirements and next, providing a best practice guide for surveillance) – arose out of past failings of firms in the region to detect and put a stop to market abuse and manipulation attempts. After conducting a series of on-site inspections of Broker’s trade surveillance programs, MAS commented on the shortcomings in its Consultation Paper. The paper concluded: "The absence of information or the delay associated with the retrieval of information, on the identity of persons who are the beneficial owners and/or who exercise control over trading accounts have impeded investigations into market abuse." It went on to state: "In the course of our investigations into suspected market abuse, we have uncovered instances of trading accounts being used without written authorisation from the account holders, or used for illicit activities such as insider trading and market manipulation."
As is the case with the fiduciary duty applicable to investment advisers under the Advisers Act, the term "best interest," is not expressly defined and instead is understood through interpretations, what "acting in the best interest" means. Whether a broker-dealer has acted in the retail customer’s best interest in compliance with Regulation Best Interest will turn on an objective assessment of the facts and circumstances of how the specific components of Regulation Best Interest—including its Disclosure, Care, Conflict of Interest, and Compliance Obligations—are satisfied at the time that the recommendation is made (and not in hindsight).
The MAS Consultation Paper will undoubtably drive major changes in Singapore regulation. The most likely effect will be greater controls on communications which result in an order or an execution. In turn, this will bring surveillance practices in Singapore in line with other major global regulations such as MiFID II and Dodd-Frank. MAS’s proposed requirements apply to all Financial Services Organizations (FSOs) in Singapore that deal in capital markets products. They will require communication records around broker-assisted Orders and Trades (O&T) to be kept for five years, among other things.
Beyond the requirements outlined in the Consultation Paper, the jointly issued practice guide provides additional guidance to FSOs that might be looking to refine their trade surveillance operations in line with the new requirements, connecting the dots between what is likely to be required and how technology can help firms structure their approach.
Adjusting Surveillance Operations
Outlined in the practice guide, MAS proposed five guiding principles which firms should consider when aligning their trade surveillance programs. Among its recommendations were improvements to oversight, detection mechanisms, resource allocation, recordkeeping and communication. In order to effectively address these principles, firms will want to consider the following surveillance initiatives:
- Automating Trade Surveillance and Analytics
The guidance: According to the MAS Guidance, FSOs should implement "appropriate systems and structured processes" in order to detect potential market misconduct. These systems and processes should be designed to meet any requirements issued by regulators and updated regularly to keep pace with market developments and regulatory changes. To accomplish this, MAS and SGX recommend adopting automated surveillance systems, artificial intelligence and machine learning to enhance the monitoring of trading activities.
- Recording of Communications
The guidance: According to the MAS Guidance, FSOs should record all communications between TRs and the persons providing instructions on orders and trades in clients’ accounts. This extends to all communication channels, including messaging services like chat, text and social media as well as voice communications. Records of such communications, which may provide strong evidence of market misconduct, should be made readily available to surveillance staff for their review and active monitoring. To accomplish this, as communication channels become increasingly diverse and used as evidence of market misconduct, MAS states that this will require the use of more sophisticated surveillance tools.
- Monitoring for Market Abuse
The guidance: According to MAS, trade surveillance programs, including the specific alert types, exception reports, parameters and thresholds, should be commensurate with a broker’s nature of business and scale of operations. For example, firms should monitor the following types of activities (keeping in mind that this list neither exhaustive or definitive):
• Pre-Arranged Trading
• Wash Trades
• Front Running
• Ramping/Price Driver
• Security Dominance
• Insider Trading
• Unauthorized Trading
Additionally, the surveillance operation should be back-tested with historical data to ensure its effectiveness and reviewed annually (or as deemed appropriate) to ensure continued effectiveness – especially if the firm’s models have too many or too few exceptions, or too many false positives. For any alerts and exceptions raised, MAS first advises that firms should conduct robust assessments with proper records (within a reasonable period) to ensure timely review and escalation of potential market misconduct.
One thing is abundantly clear – in order to comply with these new regulations FSOs will need to step up surveillance, and this will require new surveillance approaches and technologies. As outlined in MAS’ guidance, if firms are to record and surveill all aspects of communications and implement automated, dynamic alerting systems, they’ll require a new generation of surveillance technology. Random sampling approaches to communications surveillance and simple lexicon-based alerting systems will no longer fit the bill. FSOs will need to take the next step forward and implement AI- and machine learning-driven solutions to monitor trades and communications if they’re going to improve their market manipulation detection capabilities.
As MAS’s guidelines push firms to adopt more advanced surveillance techniques, it is likely that these new regulatory advisements will also act as stepping stones to other future requirements. One example might be more timely and enhanced Trade Reconstruction, similar to what’s currently required in other regions (as a result of ESMA’s MiFID II). Firms would be prudent and wise to not just think about what they need to do to meet MAS’ expectations today, but also start thinking about potential requirements down the road that will necessitate more holistic surveillance techniques.
Are you working for a Financial Services Organization (FSO) that deals in capital markets products? For those of you in Singapore, the clock is ticking. The consultation will be implemented six months following the regulatory notice. FSOs can either choose to wait and be reactive to what comes next, or be proactive and plan for future regulations today.
Attend our Executive Luncheon on "Understanding MAS/SGX’s Trade Surveillance Guidance" in Singapore on 17 October 2019. Register here.