Financial Regulatory Forum

Exchange traded funds’ growth raises multiple regulatory issues

By  Patrick Conroy, James Overdahl, Robert Patton and Raymund Wong; NERA Consulting, Thomson Reuters Accelus contributing authors. The views expressed are their own.

NEW YORK, Oct. 19 (Thomson Reuters Accelus) – Exchange-traded fund (ETF) strategies continue to increase in scope, involving active management and more sophisticated financial instruments. The increasing flexibility and versatility of ETFs have been accompanied by claims by regulators and others of destabilizing effects on markets and potential for abuse by market professionals. Moreover, the suitability of ETFs for retail investors and even institutions has become a source of greater concern. Furthermore, the size of the ETF market has more than tripled by number of ETFs, and more than doubled by net dollar value of assets, over the past four years, as you can see from this chart. (more…)

COLUMN – Rogue traders, delta trading and exchange-traded funds

By Helen Parry, the views expressed are her own.

LONDON, Oct. 7 (Thomson Reuters Accelus) - There are many common features in cases of rogue or unauthorised trading, including the use by ostensibly riskless arbitrage traders of fictitious trades on internal systems to mask their unhedged positions. One obvious feature that is present in many rogue trader cases has been a failure in trade confirmation systems and controls. This feature frequently appears conterminously with the fact that a trader has intimate knowledge of and/or power and influence over middle and back office systems. (more…)

U.S. SEC warns brokers over market access, sub-accounts in debut “risk alert”


By Stuart Gittleman and Brett Wolf

NEW YORK, Sept. 30 (Thomson Reuters Accelus) – The U.S. Securities and Exchange Commission (SEC) issued an unexpected warning to broker-dealers to supervise trading by customers with direct market access, especially customers that trade using master- and sub-accounts.

The notice came in the first in a continuing series of risk alerts the Office of Compliance Inspections and Examinations (OCIE) staff expects to issue. The staff did not say whether OCIE found related deficiencies, or at what level, in recent exams, or in reviewing the findings of recent exams by the Financial Industry Regulatory Authority (FINRA).  (more…)

The compliance lessons, so far, arising from the UBS rogue trader

LONDON, Sept. 23 (Thomson Reuters Accelus) – UBS’s loss of $2.3 billion has hit the headlines worldwide, and while full details of what went wrong are unlikely to be public in the near future there are already compliance lessons for other firms. UK and Swiss regulators have launched an investigation into:

    the details of the unauthorised trading activity;
    the control failures which permitted the activity to remain undetected; and
    the overall strength of UBS’ controls to prevent unauthorised or fraudulent trading activity in its investment bank.

Although the investigation is ongoing, and the regulators have expressly stated that they do not, as yet, have an expected timescale, there are a number of lessons or steps for other firms to consider. (more…)

Rogue traders will always pose risk to compliance controls, says industry

Traders work at their desks in front of the DAX indexBy Martin Coyle and Alex Robson

LONDON/NEW YORK, Sept. 16 (Thomson Reuters Accelus) – The $2 billion rogue trading incident at UBS demonstrates that determined individuals will always be able to circumvent internal systems and controls despite the recent regulatory scrutiny on this area, industry officials said. The case also highlighted the need for banks to think about their reward structures, they added.

UBS yesterday confirmed that 31-year-old London-based trader Kweku Adoboli had lost the bank around $2 billion in unauthorised deals. The director of exchange-traded funds (ETFs) and “Delta 1″ was arrested on suspicion of fraud at his desk by City of London Police at 3:30am. (more…)

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