SINGAPORE (Aug 5): The Monetary Authority of Singapore on Monday released a consultation paper on requirement on controls against market abuse as well as a joint practice guide on trade surveillance with the Singapore Exchange.
The consultation paper outlines four measures that MAS is proposing to impose on financial institutions that deal with capital market products. These are the client identification rule, records of communication on orders and trades, client device identification as well as register of cash and third party payments.
The proposed client identification rule is for Financial Institutions (FIs) to establish arrangements with clients to facilitate the provision of ultimate beneficial owner information to MAS or any law enforcement agency within five business days upon request.
While FIs already have ultimate beneficial owner information as a requirement, this rule is meant for FIs to put in place sufficient measures to comply with the client identification rule, especially when acting as a counterparty for another FI. This is to foster timeliness in furnishing the information to law enforcement agencies.
The records of communication on orders and trades rule requires FIs to keep a record of all communications between the trading representative and the person instructing a trade. This would mean the recording of trade orders and instructions from instant messages and calls, with a call back to the person on a recorded line if the original instructions were not recorded.
This is important as these records will constitute critical evidence in market abuse investigations into identities of the persons who instructed the trades, especially in cases where perpetrators attempted to hide identities by giving instructions for accounts they were not authorised to operate.
The client device identification rule requires FIs to capture and record the device identification number for orders and trade executed via mobile trading applications on smart devices. FIs will have to log any device ID that has been used to execute orders and trades on their mobile trading applications. This is in addition to tighten the rules on recording trade instructions, and captures information to identify the individuals placing orders via the mobile applications.
The register of cash and third party payments rule will see FIs maintain their own centralised electronic register of all payments in cash for the customer’s own or a third party account. The FIs will need to record the identity of the payer including their national identity number, residential address and contact number, the reason for paying in cash, and the source of the funds.
For payments by a third party, FIs will need to record the relationship of the third party with the account holder, whether the third party exercises trading authority over the account and the reason for making the payment on behalf of the account holder.
For non-cash payments, the FI will document details such as mode of payment, name of counterparty bank and account holder, as well as conduct due diligence checks as the same for third party payments should the amounts exceed $20,000 in a single payment or over several payments in a one month period. This is due to investigations into market misconduct having shown that this could be an avenue to hide the trail of illicit trading activities that exploit FI’s practices and policies on account funding.
While cash payments may not make a significant chunk of trades even at retail brokerages, it still is a common avenue to settle trades. Cash remains a convenient channel for perpetrators of market misconduct to hide their activities.
The joint MAS-SGX trade surveillance practice guide was also launched to provide clarity in trade surveillance as well as highlight poor practices while recommending good ones. In the guide, brokers are reminded of their obligations to deter market misconduct as well as their duty to supervise staff and ensure that trade representatives conduct themselves in accordance with regulatory requirements. Brokers are also reminded that they are required to review trade activities and submit the require reports to the regulators in the event of potential market misconduct.
The guide also has self assessment questions for brokers to assess the adequacy of their trade surveillance operations. In the guide, SGX and MAS has set out five guiding principles for trade surveillance operations; strong senior management oversight, sound detection mechanisms and assessment framework, sufficient resources for trade surveillance, proper record keeping and assurance and prompt and confidential communications on potential market misconduct.
MAS and SGX have also set out guides for brokers to monitor for potential market misconduct such as pre-arranged trading, wash trades, front running of client orders, ramping/price driver, security dominance, insider trading and unauthorised trading. The regulators are quick to stress in the guide that these are not exhaustive or definitive factors for potential market misconduct, and that their monitoring should be tailored to commensurate with the complexity of each case.
The regulators strongly encourage brokers to adopt the good practices stated in the guide, and will refer to the guide for future inspections to evaluate the brokers’ trade surveillance programmes. These measures outlined in both the consultation paper and guide are new requirements for the FIs and help pave a common standard in the industry. This in turn facilitates investigations into potential market misconduct.
“The proposals in the notice, together with the practice guide, are part of MAS’s broader efforts to enhance surveillance and risk management practices in the industry. They will also strengthen MAS’s ability to monitor and take swift action to investigate market abuse cases in Singapore, such as trading irregularities and price manipulation.” says an MAS spokesperson.
