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ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Insights:

• Supervision/Enforcements Coming: Expect increasing operational risk management expectations to be applied to the trade surveillance program.
• Breadth of Surveillance: Ensure a robust program for assessing trading activities across trading venues and platforms, and for varying scenarios of potential market misconduct.
• Oversight: Demonstrate effective Board oversight and risk management of the trade surveillance program.
• Monitoring: Establish sound routines for data reconciliation/quality, threat detection and ongoing monitoring and testing of trade surveillance and reporting.

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April 2024

As part of regulators� focus on heightened risk standards, financial institutions are facing increased regulatory scrutiny in the management and oversight of trade surveillance programs. It is crucial for these institutions to understand regulatory expectations and requirements to implement robust compliance programs capable of effectively mitigating risks related to market conduct and trade activities.

Supervision/Enforcement

While the capital markets regulators are primary in areas of trade monitoring, reporting and surveillance, the prudential bank regulators also have expanded supervision of trade surveillance activities under their Safety and Soundness and Operational Risk authority. In keeping with existing risk management standards and frameworks, financial services regulators expect companies� risk governance and risk management frameworks to incorporate policies and standards, credible challenge, and demonstrable evidence of dynamic risk assessment in support of the design, effectiveness, and sustainability of risk controls.

In addition to heightened supervisory efforts, there is an uptick in trade surveillance enforcement activities with allegations such as:

• Inadequately surveilling trading and order activities on trading venues, including systems or electronic platforms that are operated by investment firms or market operators that bring together third party buying and selling interests in financial instruments to conduct transactions.
• Operating a trade surveillance program without adequate data oversight, controls, and reconciliation processes to maintain an effective trade surveillance program.
• Lacking adequate governance, standards, and procedures over trading venues onboarding and management as well as gaps in venue coverage.
• Lacking updated product hierarchy, data requirements, and wireframes for enhanced new and modified venue activities and mapping to surveillance requirements.

With each of the above, regulators are looking at heightened expectations, including: 

• Governance: Enforcement of policies and procedures to effectively surveil trading activities across trading platforms including eComms channels.
• Oversight: Demonstrable oversight of the board of directors, or committee, of a trade surveillance program.
• Risk assessments: Accurate and complete inventories and risk assessments of all trading venues including legal obligations.
• Data reconciliation: Implementation of automated data reconciliation processes, and compensating controls where automation is unavailable, that sufficiently assess the effectiveness and comprehensiveness of the trade surveillance program on an ongoing basis.
• Threat detection: Established trade surveillance scenarios and parameters designed to reasonably detect market misconduct.
• Monitoring: Measures to ensure routine and annual trade surveillance program monitoring, testing, and assessments, and subject to independent validation.
• Issues Management: Identification and resolution of non-surveilled trading activity and related market misconduct, alert disposition and case escalation and documentation.

Further, the following regulatory issuances are indicative of recent and ongoing supervision and rulemaking in the area of market structure and trade settlement, reporting, and surveillance: