FMSB publishes Spotlight Review on monitoring FICC markets and the impact of machine learning

3 August 2020 – The FICC Markets Standards Board (FMSB) has today published a Spotlight Review looking at current and future challenges that FICC market participants face in market surveillance.

This Spotlight Review outlines:

  • factors driving the pace of change in market surveillance;
  • the acute impact of data on surveillance effectiveness;
  • surveillance of complex algorithms and machine learning;
  • employing machine learning to empower surveillance; and
  • the vital role agility plays in effective surveillance.

FMSB believes this Spotlight Review will be of interest to a wide audience across financial institutions including those managing conduct risk, compliance and surveillance and also those working more broadly on the application of machine learning.

Lukasz Szpruch, Programme Director for Finance and Economics at The Alan Turing Institute, said: “In the Finance and Economics programme at The Alan Turing Institute we are addressing the key challenges of adopting machine learning techniques in the financial services industry by relying on transparent, reliable, and reproducible research. We welcomed this opportunity to work with FMSB on its review of market surveillance. By examining the significant opportunities and risks that machine learning methods offer relative to more traditional rules-based algorithms this paper facilitates an important discussion about the most relevant factors that could impact industry best practices across financial market participants.”

Martin Pluves, CEO of FMSB, said: “The role of market surveillance remains a high priority for regulators and financial firms. Perhaps never more so than during the outbreak of the COVID-19 global pandemic with high volatility and large numbers of sales and trading staff working remotely. This ‘perfect storm’ forms the backdrop to this important Spotlight Review which looks at how innovation, including machine learning, can present new problems for surveillance professionals, but conversely may also play an important part in delivering creative solutions for managing market abuse risks in the front office.”

This Spotlight Review is the third in a series that is collectively looking at issues of FICC market structure and the impact of regulatory and technological change on the fairness and effectiveness of wholesale markets.

Monitoring FICC markets and the impact of machine learning

Market surveillance in FICC has undergone, and continues to undergo, significant change as a result of regulation, the evolution of market structure, and technological developments. This Spotlight Review considers these structural and technological changes, in particular the emergence of machine learning trading strategies, and sets out some of the challenges associated with these developments for surveillance teams in FICC markets. The review then examines the role of technology as a potential solution to these challenges, creating as it does opportunities to improve market surveillance through the application of machine learning.
This Spotlight Review outlines:
• factors driving the pace of change in market surveillance;
• the acute impact of data on surveillance effectiveness;
• surveillance of complex algorithms and machine learning;
• employing machine learning to empower surveillance; and
• the vital role agility plays in effective surveillance.

Media contacts

Maitland/AMO
Andy Donald or Freddie Barber
+44 207 379 5151
adonald@maitland.co.uk
fbarber@maitland.co.uk

Notes to Editors

1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.

FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets.

FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets.

FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants.

All FMSB publications are available on the FMSB website at fmsb.com/our-publications/.

2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.

FEMR set FMSB four strategic goals:

  1. Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks.
  2. Developing best market practice through the production of standards and other materials that create a common understanding.
  3. Driving global adherence through ensuring standards are comprehensible and practical.
  4. Developing consistent approaches to market practices through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies.

3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities.

4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique.

The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/

Last updated 3 August 2020