1. #1

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    Have regulatory measures failed to curb market abuse?

    Prevention of market abuse has been one of the most arduous tasks faced by regulators across the world. After LIBOR scandal a series of measures were taken to prevent market abuse in European market. Market Abuse Directive (MAD) and Market Abuse Regulation (MAR) were two critical pieces of regulatory measures initiated by the European Commission. It is expected that with these MAD in place, following aspects of market abuse will be taken care of:


    1. Existing market abuse rules will be broadened to include abuse on the electronic trading platforms that have proliferated in recent years.
    2. Abusive strategies enacted through high frequency trading will be clearly prohibited.
    3. Those who manipulate benchmarks such as LIBOR will be guilty of market abuse and face tough fines.
    4. Market abuse occurring across both commodity and related derivative markets will be prohibited, and cooperation between financial and commodity regulators will be reinforced.
    5. The deterrent effect of the legislation will be far greater than today, with the possibility of fines of at least up to three times the profit made from market abuse, or at least 15% of turnover for companies. Member-States could decide to go beyond this minimum.


    While the regulators continue to pass one regulation after another to curb market abuse, the market players it seems are hardly deterred by these measures. What explains this better than the recent penalty of $4.3 billion dollars on the six large banks which include HSBC Holdings Plc, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co, Citigroup Inc, UBS AG and Bank of America Corp. As usual dealers in these institutions were main culprits. As per a report from Reuters,” Dealers used code names to identify clients without naming them and swapped information in online chatrooms with pseudonyms such as the players, “the 3 musketeers” and “1 team, 1 dream. Those who were not involved were belittled, and traders used obscene language to congratulate themselves on quick profits made from their scams, authorities said.”
    Frequent practices of market abuse brings to light two critical aspects

    1) The regulators at best can do post-mortem of events after they have happened and take preventive measures for future incidents which is unlikely to be fool proof. This has been proven time and again and
    2) The operational risks that cause such events need to be monitored not just by the risk team in an organization but also people who manage the dealers or those who are responsible for investment activities in an organization.

    However, the larger question of who will police the policeman still remains.

    Regulators and regulatory controls have been found to be completely inadequate to curb malpractices in financial markets. The globalized world and technology has added to further woos.

    Regulatory co-ordination in a globalized world and understanding of challenges that new technology poses to market abuse needs to be understood by regulators. There are only deterrents that can prevent market abuse which have already been tried and tested i.e. penalty and suspension of licenses of financial institutions. Probably the last hope is risk intelligence. Unfortunately this cannot be implemented by regulator alone.

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