According to Reuters, the CFTC pursued 82 enforcement actions in fiscal 2021, with fraud cases representing the largest number of actions and imposed over $2.5 billion in fines and restitution. That is an incredible sum although admittedly a large proportion was targeted at one company for market manipulation – Glencore. It does show though that the regulators have teeth and that they are pursuing manipulation and other sharp practice. Maybe that is partially why, in out risk study this year, regulatory risk showed up as an area lacking good systems coverage. As we stated in the report….
There are various forms of applications available on the market to aid with regulatory risks, ranging from trade reporting through surveillance tools that look at trading patterns for illegal or questionable trading activities. Despite the current availability of these types of solutions, the respondents in our survey saw this area as one requiring greater focus. The results of the survey are interesting as although almost half of the respondents indicated they have tools in place for regulatory risk (the most for any class of risk applications), almost 30% claimed that suitable tools were lacking. We consulted with Aviv Handler of ETR Advisory and a specialist regulatory risk expert to try to understand what was behind these results.
The first phase of regulatory risk was about trade reporting and software solutions were designed and built to support these activities, and in the main, this problem has been addressed through those software solutions. However, changes to trade reporting from various regulators are coming and must be catered for within these solutions. The second round of regulatory risk was addressed via trade surveillance and although there are software solutions to aid with this activity, they are often not adequate originating in different asset classes, for example. According to Aviv, there is a long way to go in this area still. Finally, Aviv points to market interventions being discussed by politicians in European markets in particular because of rising energy prices and volatilities. This represents a huge concern to the industry as there is little or no clarity around what interventions may occur and when. Market intervention could take the form of arbitrary price capping up to and including renationalization, he says.
There are a couple of commodity-specific trade surveillance solutions on the market but many, those originating from FinTech vendors are woefully inadequate, it seems. Moreover, there has been probably an attitude of disbelief in parts of the industry that they would need such tools. When one regulator is generating $2.5 billion in one year from fines and penalties, it seems that such solutions are needed.
The risk report is available for free here on CTRMCenter and there is also a podcast discussing the results of the study available on this site as well.