RegTech Intelligence

U.S. regulators start to fine firms failing to capture trade data in surveillance systems

By Rachel Wolcott, Regulatory Intelligence

U.S. regulators have started to fine tier-one firms for failing to capture complete and accurate trade data in surveillance systems tracking market abuse. Trade data accuracy and completeness was a significant U.S. regulatory focus, said a senior UK market abuse compliance official speaking at a conference held under the Chatham House rule this month.

JP Morgan announced last week that it faces $350 million in fines for reporting incomplete trading data to surveillance platforms. Goldman Sachs recently paid a small fine to the Financial Industry Regulatory Authority (FINRA) for failing to include relevant securities in automated surveillance. The U.S. Commodity Futures Trading Commission (CFTC) penalised Goldman $3 million in September for surveillance and control failures.

JP Morgan and Goldman were not the only tier-one firms struggling with data capture compliance vis-à-vis surveillance, market participants said.

“These fines should be a wakeup call for surveillance professionals and the open-source community,” said PJ Di Giammarino, chief executive of JWG Group, an industry think-tank in the UK. “As more products have moved on venue, liquidity has increased, but so have the opportunities for price manipulation.”

Regulators are delving into firms’ systems to scrutinise their market abuse models and the data that informs them. They are examining model validation and client risk assessments and aiming to ensure that all trades from firms’ source systems are being captured and funnelled into the surveillance systems.

“Regulators have become increasingly granular in their inspections, right down to the level of the right critical data elements,” Di Giammarino said. “Firms have struggled with data controls for years and face a daunting challenge to produce a full audit trail. JWG believes there is an enormous opportunity for the industry to mutualise a solution to the surveillance data challenge through adoption of the Common Domain Model.”

Goldman’s FINRA, CFTC fines

FINRA fined Goldman $512,500 in January for failing “to include warrants, rights, units and certain over-the-counter (OTC) equity securities in nine of its automated surveillance reports designed to identify potentially manipulative proprietary and customer trading activity” from February 2009 until April 2023.

Goldman excluded the securities for extended periods, ranging from approximately two years to more than 12 years, FINRA said. In February 2021, Goldman implemented reviews to identify if it inadvertently excluded any security from new or modified surveillance reports, the regulator said.

The CFTC’s September 2023 order found that Goldman failed to maintain an adequate supervisory system that could ensure customer trading was not disruptive. Goldman’s post-trade surveillance did not properly monitor for disruptive trading activity because it was only designed to detect intentional or reckless efforts to influence daily settlement prices in futures contracts, the regulator said.

UK approach

The UK Financial Conduct Authority (FCA) has issued several Market Watch newsletters about market abuse surveillance, most recently in May 2022. A few months later, it fined Citigroup’s international broker dealer £12.6 million for surveillance failures stemming from its improper implementation of the Market Abuse Regulation (MAR). The FCA did not respond to a request for comment about the deficiencies raised in the latest U.S. enforcement actions.

Most large banks operating in the U.S. have been fined for recordkeeping and control failures related to messaging on encrypted platforms, such as WhatsApp and WeChat. The U.S. Securities and Exchange Commission (SEC) last week fined a further 16 firms for failing to maintain electronic communications records.

The FCA has not taken enforcement action against any firm for recordkeeping failures related to electronic communications. It rejected Regulatory Intelligence’s Freedom of Information Act (FOIA) request, asking whether it was investigating any firms for such failures. Regulatory Intelligence is awaiting the outcome of an appeal of that decision.

This article was originally published by Thomson Reuters Regulatory Intelligence on 20 February 2024

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