REGULATION
selectionoffirms. Compliance Monitoring Programme
From its thematic review, the FSA The FSA seems to acknowledge that monitoring the commodities
identifiedthefollowingissues: marketsformarketabusewithanappropriateriskbasedmonitoring
programme is difficult. However, from its review, the FSA identified
• Greater need for Suspicious somegoodpracticeexamplessuchas:
Transaction Reporting training and
identification. • Firms reviewing their own trading around large client orders to
• Enhanced risk based compliance identifyfront-running.
monitoring. • The identification of risk periods for market misconduct, for
• Review of firms’ policies and example contract expiry periods, combined with the review of
appropriate staff training to unusualtradesundertakenduringtheseperiods.
ensure that traders are aware of • Checking the trading patterns of new accounts and discussing
their responsibilities. thesepatternswithexperiencedtraders.
Suspicious Transaction Reporting Anti-Market Misconduct Training
Since July 2005, there has been an It is essential that all relevant staff receive appropriate and up
obligation to submit Suspicious to date anti-market misconduct training, which is bespoke to the
Transaction Reports (STRs). Of the 700 commodities industry. The FSA have identified that certain firms
or so STRs submitted, only a handful rely on general market abuse training without any specific com-
have related to commodities. Whilst modityfocus.Giventhedifficultiestoidentifymarketabuseinthe
acknowledging that it is difficult to
identify market abuse in the commodi-
Firms should consider exactly what information falls
tiesmarketcomparedtosaythesecuri- within the definition of inside information and how
ties market, the FSA states that it
to handle such information
“…would have expected to have
receivedagreaternumberofSTRs,par- commodities industry, it is essential that the training is specifical-
ticularly in relation to attempted ly tailored to the commodities sector. The FSA have emphasised
manipulation or suspicious behaviour. that commodity traders and their support staff need to know
In support of this view, we note that a what to look for and therefore have confidence when reporting
numberofincidentshavebeenbrought suspicious transactions.
to our attention from sources other
than regulated firms where we believe Inside Information
an STR from the relevant firm would The FSA acknowledges that it can be more difficult to identify
havebeenappropriate.” inside relevant information in commodities markets compared with
Such a statement is a clear warning the equities sector. Firms should consider exactly what information
shot from the regulator; the FSA toler- falls within the definition of inside information and how to handle
ancelevelforsystematicfailuresisvery suchinformation.TheCESR/CEBSjointpaperdescribeshow,“Many
low. When STRs were first introduced, producers of commodities engage in derivative transactions. These
perhaps fearing an influx of defensive
reports,theFSAwarnedregulatedfirms
... it would seem that for the commodities industry,
to consider carefully before submitting
the FSA would prefer firms to make STRs
a STR. However, it would seem that for
the commodities industry, the FSA producers may have information from the underlying commodity
wouldpreferfirmstomakeSTRs. productionandsupplyactivities.Derivativestradingbasedonknowl-
The FSA has suggested that com- edgeoftheproductionandsupplyactivitiesshouldnotgenerallybe
modityfirmsmaybesettingthebench- regardedasaninappropriateuseofinformationifthatinformation
mark of suspicious behaviour too high. ispubliclyavailable.”
The FSA expects firms to be able to
identify unusual behaviour based on Client Position
their greater knowledge of a particular The FSA is aware of general concerns that market professionals
market, product or customer even if who execute client business may be disclosing the information of
actual market misconduct is not readi- other clients’ trading intentions and positions to favourite clients.
lyapparent.TheFSAhaslongheldthe The FSA emphasises that those acting in a brokering capacity may
view that as regulated firms have day- providesomemarketcommentarybutthedisclosureofpreciseinfor-
to-day contact with the market, they mation as to the exact position of stock losses and details of other
should police themselves. This is not a clients’ positions may be viewed as the misuse of information form
suggestion of a return to self-regula- ofmarketabuse.TheFSAencouragesfirmstoconsidertheircontrols
tion, but a form of market neighbour- inthisareaandunderPrinciple11ofthePrinciplesforBusinessesto
hoodwatch. notifytheFSAofsuchconcerns.
82 SEPTEMBER 2008 COMMODITIES NOW
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