Trends in trade surveillance and regulation
In the first two installments in this blog series, we looked at the regulatory actions from the CFTC in fiscal year 2018 and one of the central messages that the agency is trying to deliver. In the first case, we saw that the size and complexity of enforcement activity are at all-time highs, and in the second, we explored the stated goal of the agency to foster a culture of accountability at firms all the way from individual traders right up to the top of the C-suite. In this final installment of the series, we focus on the evolving issues of regulation regarding trade surveillance and risk monitoring finishing with thoughts on how Eventus can partner with you to meet – and exceed – regulatory requirements.
Important Issues Going Forward
Three important areas have emerged that deserve special attention: increasing complexity in both manipulation schemes and the agency’s response to that activity, the extension of enforcement actions to individuals and firms that may not otherwise be covered explicitly by the agency, and the attempt by the CFTC to extend liability to entities that have no direct involvement in trading.
It’s only natural that the complexity of manipulative and otherwise illegal activity has increased over the past several years as software and systems have become more powerful and markets more interconnected. In this environment, we can expect that the sophistication of manipulative behavior and the regulator’s response to this activity will only continue to expand.
As enforcement activity has increased, so too has the willingness of regulators to widen their net to people and firms not directly involved in surveillance and compliance, including those that have never been subject to a requirement that they register with an agency or SRO. Rules and regulations regarding prohibited activities apply to everyone, whether or not they’re explicitly covered by registration requirements, and regulators have extended their activity by coordinating with other agencies and federal law enforcement to expand enforcement actions. In the face of complex issues, regulators have stepped up their game with regard to trade surveillance and risk monitoring and are likely to continue this trend going forward.
A precedent to keep an eye on
One of the pending cases brought by the CFTC in 2018 is of particular interest to us as a software company. This case involves “one individual and company who allegedly built a computer program designed to spoof and manipulate the market” and refers to a firm that developed software for a trader but did not otherwise participate in any of the trading activity involving that software. While all of the facts in this case have not been made public and the case itself may not reach the courts for some time, it could set a troubling precedent for firms that develop software that is later used for illicit purposes, even through no fault of their own. This extension of strict liability to non-traders could have a chilling impact on innovation and collaboration. We believe that this case deserves close examination and vigorous debate.
How Eventus Can Help
Eventus Systems is perfectly situated to be your partner in addressing the complex and growing issues around market behaviors that require trade surveillance. With deep experience in both principal and agency roles in a wide variety of markets and asset classes, we have a thorough understanding of the issues that need to be addressed. We place an emphasis on superior reports and audit trails because these are the key artifacts that regulators want to see, and having them helps to both simplify interactions with them and lessen the time, cost and impact of any investigation. Finally, we continually develop tools with the latest technologies, including machine learning and artificial intelligence, in order to provide our clients and partners with all of the tools that they need to meet their needs.
A new focus on transparency and enforcement at the CFTC
At the end of the day, James McDonald’s recent speech at NYU on recent trends in enforcement actions at the CFTC puts a sharp point on the fact that the agency is extremely motivated to police the markets in the most effective ways possible. Not only was the recent report the first time that the agency had published an annual enforcement recap, but the agency also took the step of moving the Market Surveillance unit from Market Oversight to the Division of Enforcement. Further, the CFTC recently published its examination priorities for the coming year, also a first for the agency. With these moves it’s clear that the CFTC, just like its counterparts at the SEC, means business when it comes to market protection, and all market participants will do well to take heed in all matters relating to trade surveillance and risk monitoring.
For further reading
Eventus Systems, Inc. offers one of the leading global trade surveillance and market risk platforms. Available as a cloud-based or real-time enterprise on-premise solution, the Validus platform provides sophisticated market surveillance and financial risk capabilities, enabling clients to solve some of the most pressing regulatory challenges. For more information, contact us at email@example.com