The Financial Services Authority (FSA) has revealed that it plans to carry out random checks on trading firms’ reporting activities in a bid to clamp down on rogue trading and market misconduct.
In the FSA’s annual business plan, it hinted that increased measures would be taken against firms breaching transaction reporting requirements, as it pointed to “patchy” compliance.
The report stated: “During 2012/13, in line with our credible deterrence approach, we will focus on this area. Where firms fail to respond appropriately and improve standards, we will increase penalties.”
An FSA spokesperson confirmed that the work will be carried out by the regulator’s transaction reporting team, and trading firms will be given 24 hours’ notice as to when the checks on systems and reporting techniques will happen.
“Firms have always been required to comply with reporting requirements, but now we will be going out and visiting random samples of firms to ask them to show us their systems and how they are complying,” said the FSA spokesperson.
Rik Turner, senior financial services technology analyst at Ovum, said that the announcement should not be surprising to companies given the focus on compliance since the onset of the global economic downturn.
“This is all part of regulatory activity in the wake of the financial crisis, but also more broadly, a feeling that we need to keep an eye on ‘casino banking’ and high frequency trading,” said Turner.
“The FSA wants to ensure that these firms are adhering to the appropriate rules and reporting accordingly.”
He added: “This announcement refers to post-trade activity. The FSA wants to know whether or not these trading firms have got their systems in the middle and back office up to scratch. It wants to know whether they are reporting in a timely fashion, and also whether they are doing it in an honest manner that leaves no room for market abuse.”
Turner also points out that large trading institutions, such as Goldman Sachs or JP Morgan, will have a lot of the required reporting processes automated. Smaller players may be put under pressure by the 24-hour notice period, however.
“If you look at some of the smaller firms, a whole swathe of functionality in the middle and back office may still be reliant on excel spreadsheets. They are doing all kinds of different pieces without any real automation,” said Turner.
“There will be a push to automate by virtue of that fact that the FSA could turn up at your door in 24 hours. If you have got five guys sitting down with Excel spreadsheets, working until all hours, burning candles at both ends, just to be able to provide some meaningful data, this is not an ideal situation,” he added.
“This is serious for firms. Not only will the fines be painful, but if any breaches are found, they will also suffer a reputational blow.”