FMSB Issues Good Practice Statement on Unauthorised Trading

The Financial Markets Standards Board (FMSB) has released its latest Statement of Good Practice (SGP), this time to help firms mitigate the risks from unauthorised trading.

FMSB says the financial services industry has invested heavily in the design and implementation of risk management frameworks to ensure that activities are conducted within authorised boundaries, including avoidance of incidents of unauthorised trading which are a potential source of significant financial loss and reputational damage at industry as well as firm level. 

Notwithstanding that, however, it acknowledges there is a continuing risk that novel or existing vulnerabilities could allow unauthorised trading to occur or remain undetected. 

Active cross-jurisdictional regulatory engagement on unauthorised trading has been bilateral, with detailed feedback provided to individual firms, it observes, adding, in the absence of comprehensive industry guidance or published expectations, baseline standards for unauthorised trading frameworks have not been advancing consistently across markets or jurisdictions. 

With this in mind, and following on from its work on front office supervision, FMSB says it convened a Working Group, led by Alison Higgins, head of markets UK and Europe and head of prime at Standard Chartered, as well as co-head of FMSB’s Conduct & Ethics Committee, to develop industry-wide, good practice guidance to support firms in their efforts to prevent, or mitigate, the risk of unauthorised trading activity in wholesale markets. “Today’s publication reflects input from across FMSB Members, with both buy-side and sell-side firms contributing. It also benefits from contributions and support from the global regulatory community,” FMSB states.

The SGP establishes a framework that outlines the governance and supervision processes around unauthorised trading, as well as the parameters for such action. It recommends that these boundaries are clearly defined and understood by the relevant business units.

Firms should also assign and document accountable “owners” and functions to design, implement and monitor activities, the SGP says, to ensure common a understanding of how each business function’s activities and controls contribute to the prevention and detection of unauthorised trading.

In order to embed a culture of effective supervision and risk management related to unauthorised trading across the organisation, the SGP states firms should deploy and promulgate appropriate leadership communication, training, measurement and monitoring tools. Firms should also ensure that the consequences of unauthorised trading are clear to all concerned.

The SGP also recommends that firms employ a range of pre-trade and point-of-trade control mechanisms to mitigate unauthorised trading scenarios. These include limiting the breadth of book and systems access, and utilising blocks or notifications prior to trade execution. They should also monitor financial and non-financial controls and indicators across the front-to-back trade lifecycle that may identify and/or signal potential unauthorised trading. “Consideration should be given to how these indicators may interrelate or aggregate in unauthorised trading scenarios,” the SGP states. “Risk-based analysis and trend analysis should be employed to highlight linkages between signals and/or potential outliers that warrant further investigation.”

Market participants should also conduct regular testing of their controls to ensure they remain fit for purpose – they should also, on an ongoing basis, and proportionate to their size and complexity, identify and assess the potential unauthorised trading scenarios that may occur, informed by recent or historic industry events, internal events and the relative strengths and weaknesses of the control environment. Escalation and management reporting processes should also be established to support this mitigation work.

“The potential for reputational and financial damage is clear motivation for firms to invest in managing the risk of unauthorised trading,” says Higgins. “As a Working Group, we identified that firms commonly dealt with many of the key components of a framework but few firms dealt with them comprehensively. An industry-wide understanding of the language used and a thorough approach to setting up a framework was lacking. We hope that this guidance will help to provide a solid foundation for firms, across jurisdictions, and help to inform regulatory expectations around this important topic.”

Myles McGuinness, CEO of FMSB, adds, “This publication illustrates the real value of FMSB in identifying gaps where cross-industry guidance is needed and bringing expertise together from across our membership to fill that gap.”