In the wake of its Milford Asset Management investigation, the Financial Markets Authority (FMA) has released a guide for fund managers on how to mitigate market misconduct risks.
The FMA information sheet, published last week, is an addendum to the regulator’s earlier licensing guidelines for managed investment schemes (MIS) under the Financial Markets Conduct Act.
“[MIS compliance] includes the requirement to manage market misconduct risks, such as insider trading or market manipulation, as well as client misconduct risks, such as trade allocation biases or lack of best execution,” the FMA note says.
According to the FMA, MIS “directors and senior management” must take full responsibility for their firm’s respective governance arrangements and any associated trading activities.
“This includes the conduct of their employees, whether performed by (or on behalf of) the manager or for personal accounts,” the FMA note says. “We will take seriously any evidence of a lack of focus on, or commitment to, maintaining an adequate and effective risk and compliance framework.”
As well as emphasising the need for strong internal governance rules and procedures, the regulator lists a number of specific controls fund managers should consider implementing in their businesses, including: segregation of activities; policies to cover conflict of interests, insider information and personal trading; control of restricted securities lists; and, a range of pre- and post-trade controls and monitoring procedures.
For example, the FMA note says post-trade monitoring should look for potential issues such as:
- trading patterns — including both buys and sells — in a short period of time, particularly where multiple small orders in one direction over a relatively short intra-day period appear to move prices, followed by a sizeable order in the other direction
- trades made via different brokers where this is not necessary for best execution, or over multiple [Direct Market Access] accounts.
“Managers with higher-risk trading activities such as active trading strategies, proprietary trading, or those who have Direct Market Access (DMA) systems, which may lead to a higher likelihood of market misconduct, will need more robust controls than managers with lower-risk trading strategies,” the FMA says.
On July 31 the FMA launched civil proceedings against Milford Asset Management portfolio manager, Mark Warminger, on alleged market manipulation charges.
The FMA said Warminger manipulated security prices by placing small trades on market in one direction before executing large off-market trades the other way, suspicious trading around the closing price, and “trading conducted in order to set the price, rather than for a genuine commercial purpose”.
It is understood the regulator consulted with industry experts, including operational due diligence specialists, prior to publishing the information sheet.