Key Considerations for Implementing Market Abuse Risk Frameworks – from Surveillance to AI

In today’s financial landscape, market abuse has emerged as a focal point for regulators worldwide. With heightened scrutiny from bodies such as the US SEC, the UK FCA, and ESMA, the pressure to demonstrate robust frameworks to prevent manipulative practices has never been greater.

Simon Abbott, Global Head of Compliance, for Northern Trust Banking & Markets, discusses the factors firms should consider for their Market Abuse Risk Assessment policies and the role of surveillance and AI.

At this year’s Integrated Trading Solutions Summit in London, the session on surveillance and market abuse generated some of the highest levels of engagement from our asset manager and asset owner delegates. And for good reason. Regulators across the globe are focused on ensuring firms not only adhere to but can demonstrate a robust framework for identifying and reporting market abuse.

Over the past few years, there has been significant enforcement around record-keeping failures, often referred to as the ‘WhatsApp Fines’. In addition, we have seen US regulators such as the Commodity Futures Trading Commission (CFTC) stating it’s going to be one of their core focuses going forwards.¹ Moreover, the US Securities and Exchange Commission (SEC) has market abuse front and centre of its focus on how to regulate crypto due to the potential for market manipulation.²

While asset managers and asset owners face unique challenges in developing their specific market abuse safeguards, the following factors should be considered.

Market Abuse Risk Assessment Policy

Central to surveillance efforts is a comprehensive market abuse risk assessment. These assessments form the cornerstone of an effective surveillance program, enabling firms to systematically identify and address potential risks within their organisation.

They are typically the first thing regulators ask for, however, the process is not merely a regulatory exercise. It is a proactive commitment to mitigating risks before they crystallise.

Once a Market Abuse Risk Assessment is completed these questions need to be considered:

Who should see the assessment?
Who should review it?
How frequently should it be updated?
How does this feed into the firm’s surveillance framework book of work?

Adopting a Market Abuse Surveillance Framework

Once firms have got to grips with these challenges, the next hurdle is to implement the appropriate surveillance framework.

Effective execution of your program relies on a well-defined framework. The Market Abuse Risk Assessment will support you to identify where to point your surveillance. Firms then need to decide what is “appropriate and proportionate” for their business and between automated and manual trade surveillance systems as well as ‘build’ or ‘buy’, considering budget and operational complexity.

Smaller firms may face additional challenges in implementing comprehensive surveillance systems due to cost constraints. External vendors generally offer largescale systems which may not be needed by more boutique firms – for example, if you’re a small asset manager who trades once a week.

AIs Role in Supporting Market Abuse Surveillance

Looking to the future , one of the emerging adoptions of AI across surveillance systems globally is through transcribe and translation functions for calls and video conference systems such as Microsoft Teams. Global firms often comprise of sales and clients who transact in different languages. So how do you deal with that if your compliance team is not multi-lingual? AI can support through providing the ability to generate transcriptions translated to the firm’s native business language to allow monitoring and review.

With any use of AI, firms need to think about their frameworks before they deploy. How do they approve models that rely on AI? Is their current model approval process capable of factoring in models that change almost continuously based on machine learning capabilities? AI is not a purely “plug and play” approach and regulators will be asking firms to explain how their systems work, are maintained and what comfort can they provide that they are working as expected.

Apart from the surveillance use-case, these considerations apply to the more widespread adoption of AI across a financial organisation given AI is designed to take in information across a number of data points.

Conclusion

Ensuring a demonstrable robust approach to market abuse should be a top priority for asset manager and asset owner firms. This approach needs to be underpinned by a comprehensive Market Abuse Risk Assessment which will evolve with the firm’s needs, including the opportunities and challenges posed by AI. By taking these factors into consideration, firms will be better positioned to fulfil their regulatory obligations and meet expectations.

1. CFTC Division of Enforcement to Refocus on Fraud and Helping Victims, Stop Regulation by Enforcement | CFTC

2. SEC.gov | SEC Charges Three So-Called Market Makers and Nine Individuals in Crackdown on Manipulation of Crypto Assets Offered and Sold as Securities

Meet Your Expert

Simon Abbott

Simon is Global Head of Compliance, Northern Trust Banking & Markets.

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