FSA market watch letter focuses on market abuse controls

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LONDON – The latest Market Watch newsletter from the UK Financial Services Authority (FSA) shows that firms have taken the initiative to improve controls around authorised trading but there are still gaps to work on. During informal visits to financial institutions in London, the FSA was reassured that firms were improving their rogue trader controls in the wake of the Societe Generale (SG) event in areas identified by firms as potential gaps in their risk management controls. These surround ensuring mandatory vacation for traders, IT access and cancel and correct trades.

As the significance of the SG event was increased due to the length of time it took to detect, the FSA has identified several ways to reduce the time required to deal with abnormal trading behaviour. These include: investigating substantial variances between mark-to-market and margin call movements; reducing the reliance on monthly transactional controls by changing month-end control processes to daily; considering regular fraud testing mechanisms; assessing business-based organisations within support functions; and reviewing relationships between market counterparties and front-office staff. Firms are also advised to contact their supervisor early if they have any concerns about unauthorised trading.

In a follow-up visit to hedge funds to check on their market abuse controls, the FSA stated that it intends to raise awareness of areas of concern and stress the importance of well-thought-out and applied market abuse control procedures. The newsletter covers several areas, from culture/senior management responsibility to control of inside information and monitoring of trading activity, among others, and gives advice on where firms could improve.

The FSA also expects firms to fully comply with transaction reporting requirements under the Markets in Financial Instruments Directive.
Click on link to read the newsletter in full.
http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter29.pdf