Is your Trading Venue Governance Framework up to Scratch?
JP Morgan fines are a stark warning to rest of the industry
On 14 March 2024, JP Morgan Chase was fined $348.2 million for inadequacies in its monitoring of client trading activities between 2014 and 2023. According to the Office of the Comptroller of the Currency (OCC), JP Morgan’s trade venue governance practices revealed that it failed to surveil ‘billions of instances of trading activity on at least 30 global trading venues’, with several gaps and blind spots among its surveillance monitoring framework. According to the OCC, the deficiencies in JP Morgan’s trade surveillance programme constitute unsafe or unsound banking practices. Lack of oversight can lead to a financial firm partaking in improper market practices such as insider trading.
In response to the findings, JP Morgan must now correct the deficiencies, seek the OCC’s non-objection before onboarding new trading venues, and obtain an independent third party to conduct a trade surveillance programme assessment. The OCC’s enforcement action also requires JP Morgan to review and take corrective action to address its ‘inadequate monitoring practices.’ Trade surveillance is currently one of the hottest regulatory trends in capital markets, with regulatory frameworks such as MiFID II evolving to meet an increasingly digitised and data-centric trading environment fuelled by the rise of electronic and algorithmic trading.
As a reminder, two US capital markets regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission also took action against almost a dozen organisations over record keeping failures with their combined penalties totalling nearly $550 million in 2023.
These industry developments are a wake up call to the rest of the capital markets industry, serving a reminder as to the importance of ensuring that trade venue governance frameworks are up to scratch. This emphasises the need for having an appropriate governance and management structure for a fully monitored and comprehensive trading venue programme. Regulatory enforcement from the OCC, as shown above, can could have significant financial and reputational consequences for a firm. As a result, this may prompt some firms to examine their own trading venue governance frameworks, and look at several key aspects such as their criteria for onboarding a trading venue, their due diligence protocols and where they might be deficient.
In particular, GreySpark identifies two ways in which financial firms can help stave off regulatory retribution in their trade venue management processes.
Governance of trading venues - Enhancing the governance structure to ensure robust, watertight processes for the onboarding of trading venues, coupled with the integration of regular review mechanisms. Review mechanisms can include coverage, data quality and completeness, and surveillance platform capabilities, and it should cover all regions in which the venue is used. This aspect aims to solidify the framework within which trading venues operate, ensuring alignment with regulatory standards and internal compliance requirements.
Data Management and Subject Matter Expertise on Existing Venues: This entails a thorough review and assessment of the current inventory of trading venues, focusing on the accuracy, completeness, and integrity of data associated with trading activities. The objective is to identify and address discrepancies, particularly regarding trading protocols and the classification of entities as trading venues. This can vary on a regional basis, so a firm with operations in multiple jurisdictions must ensure it keeps formality on a case-by-case basis. A critical component involves evaluating the complete data lineage for surveillance purposes, ensuring that both pre-trade and post-trade data are accurately captured and reconciled to identify and remediate any potential gaps in surveillance. Other data that should be captured includes the trading venue transaction identification code.
Financial firms should evaluate and enhance their existing trading venue management frameworks and related compliance protocols to keep in line with current and future regulatory expectations. It is risky for a firm to assume that its current frameworks are entirely compliant without conducting any regular evaluative procedures, such is the dynamic, ever evolving nature of capital markets legislation in 2024. In this way, relying on a third party who has an idea of what a good, industry-standard framework looks like, rather than on internal, underinformed audits may be more beneficial for a firm at this time.
At the same time, it is important that employees are attuned to a firm’s broader trade governance protocols. Employees must be sufficiently trained to understand their own, and the business’s, obligations with respect to trade data preservation and trade surveillance practices. Regular audits should be undertaken to assess the organisation’s compliance posture in this regard.
As GreySpark observes, the trading surveillance risk assessment process can be onerous, while some firms may lack sufficiently staffed lines-of-defence with the required authority and skillsets. A potential remedy for this is the deployment of AI-enabled governance, risk and control solution which stores trade and control data in a digital format that gives good visibility of any compliance gaps and provides the firm with notifications of the completion of control inventories and attestations in real-time.
GreySpark has several case studies of helping firms manage their risk and compliance frameworks when it comes to trade venue governance and trade surveillance. More information can be found here.