UK’s FCA detects surveillance gaps for CFD service providers
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The UK Financial Conduct Authority has reported “gaps in surveillance” among companies offerings contracts for difference (CFD) products. The FCA addressed these gaps in market abuse and manipulation in the latest market abuse peer review or Market Watch.
FCA reveals surveillance gaps for CFD service providers
The report published by the financial market regulator noted that it conducted a study into the nine CFD providers operating in the UK. In the report, the FCA said that it was evident that these providers did not pay attention to the market abuse risks faced in non-equity asset classes.
The FCA has exposed these surveillance haps despite the findings being largely positive. The reviewed CFD providers had surveillance in place to detect insider trading cases. The financial market watchdog also said that it considered most of the surveillance methods being used as effective.
The FCA noted that all the firms included in the study provided CFDs or spread bets in non-equity asset classes. However, there was very little consideration by these firms in the risk assessments for market abuse. There were also limited details on market manipulation across all asset classes.
“We did observe some weaknesses, such as the lack of consideration of market abuse risks in non-equity asset classes and market manipulation, leading to gaps in surveillance. Compliance with SYSC 6.1.1.R is also a key component of this review,” the FCA said.
Poor monitoring of market manipulation
The regulator also found that the firms offering CFD services were not doing their best to address the “narrowing the spread” of market manipulation. In this practice, traders influence the prices of spread bets or CFDs by creating a buy or sell order for security with direct market access (DMA) brokerage platform.
The trader, in this case, places this order to narrow the spread of the security and to influence the execution price of a CFD or spread bet based on them. The FCA noted that some firms offering CDF services were unaware of this practice. However, most firms were aware of the practice after submitting Suspicious Transaction and Order Reports (STORs).
On the other hand, none of the CFD providers that the regulator examined had listed this practice within their risk assessments or adopted the appropriate surveillance systems to detect the practice.
The FCA further explained that CFDs and spread bets were vulnerable to being used for insider trading practices because of these products’ speculative and leveraged nature. The regulator also said that these financial assets were a major source of STORs.
The FCA has also warned that there was an increased threat of manipulative behavior pertaining to these financial instruments. The regulator noted that providers needed to recognize the practice where spread bets and CFDs are used to realize profits because of the manipulative practices used in the underlying market through other platforms offering the same services.