ASIC Survey Provides Conduct Guidance for FX, FI Markets
Posted by Colin Lambert. Last updated: October 26, 2022
The Australian Securities and Investment Commission (ASIC) has released two reports looking at conduct risk in wholesale financial markets, including observations on what it considers good and poor practice by the market participants it reviewed.
The first report studies conduct risks in fixed income markets, something that remains in focus in Australia following ASIC’s charging of Westpac with insider trading relating to what was, effectively, a pre-hedging initiative. It identifies better and poorer practices in six key areas, although ASIC is keen to stress they are not attributable to each of the nine participants reviewed.
The regulator says all participants in wholesale markets should consider whether these better and poorer practices apply to their businesses.
On managing conduct risk more generally in fixed income markets, ASIC observed that poor practices included insufficient understanding of conduct risks and a failure to accurately identify fixed income specific conduct risks or map the risks to controls. Conversely, better practices reflected current market approaches and industry standards in design of conduct risk controls, the timely assessment of the effectiveness of processes and controls, and reviews that targeted the highest risks of misconduct and drew on lessons learned from internal and external incidents and events.
Among sales and trading desks ASIC observed some weak controls over access to confidential information, as well as insufficient staff guidance and procedures on conduct risks, particularly risks relating to non-institutional clients. That said, some firms included clear responsibilities and protocols for managing conduct risks, detailed conflicts of interest registers (including mappings to relevant controls) and staff prohibitions on using communication channels that were not approved, recorded or monitored.
The monitoring and surveillance function in some firms’ fixed income businesses had gaps in systems coverage of key conduct risks and communication channels (or they maintain records only for short periods), and ineffective calibration of monitoring/alert management. By contrast, others incorporated comprehensive data feeds (including quote, order and trade data across all fixed income securities traded), surveillance coverage of all applicable misconduct types, and effective risk-based reviews of high-risk time periods, activities, and clients.
Finally on fixed income markets, the training, supervision and governance at some firms was poor as there was insufficient coverage of Australian laws and licensee obligations in training and business manuals. ASIC also observes that some supervisors purely relied on training, policies and attestations rather than performing active oversight of non-financial risks, and had very limited information on conduct risk information provided to risk committees.
On the brighter side, the review also found firms that had embedded current case studies, scenarios or dilemmas into training, effectively supported supervisors with dashboards containing up-to-date information on conduct-related tasks, and evidenced robust challenge (including required actions) of conduct risk controls and monitoring at risk committees.
The second report, looking at the banks’ approach to conflicts management found that poor practicesincluded approaches that were reactive to incidents and regulatory inquiries, where controls were ad hocand not mapped to specific risks. By contrast better practices embedded a proactive approach for identifying, assessing and managing specific conflicts arising within each business, and across the group.
Poorer practices involving the operation of the control function included poorly resourced control rooms that were reliant on manual processes, where staff spent more time on data entry and record- keeping than assessing and responding to commercial and transactional conflicts. Better practices included proactive monitoring and challenging of front-office business activities by control room staff.
Elsewhere, ASIC observed broadly drafted policies and procedures, which led to confusion when applied to specific business activities and mismanagement of conflicts, while on the positive side others provided sufficient detail for staff to understand how to identify and appropriately manage conflicts that may arise in ordinary business and employee behaviours.
There were also instances of weak information barriers, although again ASIC says some participants operated robust barriers that were continually aligned to current business models and activities. Some firms operated training of control staff that was too generic, while others offered bespoke training, equally some firms operated without appropriate governance committees, while others had clear escalation channels.
While ASIC does not call out specific institutions in its reports, it is clear that the regulator has established what it believes is minimum standards for market participants and is sending a clear message to all in the local market that they will be judged accordingly.
“Wholesale financial markets, including fixed income, currencies, and commodities markets, are global, complex, and rapidly evolving,” says Danielle Press, commissioner of ASIC. “Because these markets underpin growth in Australia’s real economy by providing financing to governments, financial institutions and corporates, misconduct can have wide-reaching impacts. As such, we have increased our focus on the conduct of participants in this sector.
“Participants in wholesale financial markets should consider how they compare with these better and poorer practices,” she continues. “High standards of conduct and oversight, such as the better practices in the reports, strengthen market integrity and confidence in Australia’s wholesale financial markets.”