Market Abuse Rules Raise Compliance Bar

Terry Flanagan

The new market abuse requirements set down by the Securities and Exchange Commission and the Commodity Futures Trading Commission, impose registration and other requirements on firms that subject them to potentially greater scrutiny by U.S. regulators.

“Under the new rules, swap entities, both dealers and major participants, will have to register and be more highly regulated,” said Rex Gooch, vice-president and head of product strategy for trading technology company SunGard’s Protegent surveillance unit. “Market participants will be subject to mandatory clearing requirements for OTC derivative transactions meeting certain criteria.”

The CFTC has adopted a new rule that makes it easier to prove fraud and manipulation in the derivatives markets and expands the Commission’s authority into new areas, such as commodities and swaps.

In addition, the SEC intends to expand its anti-manipulation provisions to security-based swaps and impose broader liability with respect to securities generally.

Although many firms maintain manual anti-manipulation records, the complexity and interconnectedness of these new and expanded requirements make automation a top priority.

“Market abuse is on regulators’ radars at the moment,” said Miranda Mizen, principal and director of equities research at Tabb Group, a capital markets consultancy, in a statement. “Market participants need increasingly sophisticated and flexible surveillance capabilities as regulatory demands broaden and clients become more discerning. Businesses are complex, and data is voluminous and distributed, requiring surveillance systems that can efficiently and effectively offer multi-dimensional capabilities.”

To help customers comply with the new rules, SunGard has enhanced Protegent with an extended rules library to help flag potential instances of market abuse as outlined by the CFTC’s anti-manipulation rules, as well as case management tools to help increase the productivity of surveillance.

SunGard provides market data from more than 160 trading venues globally, which customers can use to help them distinguish market anomalies from potential acts of manipulation, said Gooch.

Market participants will now be subject to new position limit requirements on certain options, futures and swap contract holdings.

“Swap entities will be subject to business conduct standards, margin and capital requirements, as well as other risk management and record keeping requirements,” said Gooch.

The market abuse directive (MAD) in Europe, which was adopted in 2003, is similar in scope and impact as the anti-manipulation requirements of the 2010 Dodd-Frank Act, which have been set down by the SEC and CFTC.

“Market abuse specifically identifies prohibitive trading behaviors used for manipulating market prices or insider trading,” said Gooch. “[In Europe], MAD, MAD II, Esma, MiFID and MiFID II have focused on better defining and regulating against manipulative activities that hinder fair markets.”

Dodd-Frank is focused on increased transparency and systemic risk, but those items also position the U.S. to better monitor and regulate against market abuse. “Regulators are working together more than ever,” said Gooch. “So we expect to see similar scope and focus as this collaboration continues.”

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