IOSCO publishes recommendations on market integrity
Thursday 20 October 2011 IOSCOThe Report analyses the most significant technological developments
that have arisen in financial markets in recent years and their
impact on market integrity and efficiency, and sets out
Recommendations to assist securities markets regulators in
mitigating these effects. These are designed to:
The Recommendations were developed in response to the G20 Leaders request in November 2010 that IOSCO should “develop recommendations to promote markets’ integrity and efficiency to mitigate the risks posed to the financial system by the latest technological developments”.
IOSCO Recommendations on Market Integrity and Efficiency
The Recommendations set out high level guidance to address issues in two specific areas:
Trading venue operators and trading participants
Recommendation 1: Regulators should require that trading venue operators provide fair, transparent and non-discriminatory access to their markets and to associated products and services;
Recommendation 2: Regulators should seek to ensure that trading venues have in place suitable trading control mechanisms (such as trading halts, volatility interruptions, limit-up-limit-down controls, etc.) to deal with volatile market conditions. Trading systems and algorithms should be robust and flexible such that they are capable of dealing with, and adjusting to, evolving market conditions. In the case of trading systems, this should include the ability to adjust to changes (including sudden increases) in message traffic;
Recommendation 3: All order flow of trading participants, irrespective of whether they are direct venue members or otherwise, must be subject to appropriate controls, including automated pre-trade controls. These controls should be subject to the regulatory requirements of a suitable market authority or authorities. In addition, regulators should identify any risks arising from currently unregulated direct members/participants of trading venues and, where any are identified, take concrete steps to address them;
Regulators
Recommendation 4: Regulators should continue to assess the impact on market integrity and efficiency of technological developments and market structure changes, including algorithmic and high frequency trading. Based on this, regulators should seek to ensure that suitable measures are taken to mitigate any related risks to market integrity and efficiency, including any risks to price formation or to the resiliency and stability of markets, to which such developments give rise.
Recommendation 5: Market authorities should monitor for novel forms or variations of market abuse that may arise as a result of technological developments and take action as necessary. They should also review their arrangements (including cross-border information sharing arrangements) and capabilities for the continuous monitoring of trading (including transactions, orders entered or orders cancelled) to help ensure that they remain effective.
IOSCO’s future work plan
In support of the Report’s Recommendations IOSCO will carry out work in the following two areas:
a) Development of recommendations on market surveillance
· IOSCO will assess the new challenges that technological changes pose for regulators in their market surveillance, which include: the fragmentation of markets; the dispersal of trading information; the increased speed of trading; and the ability to gather and process the increased volume of trading data. It will consider the feasibility of regulators having additional tools to deal with the challenges arising from market surveillance, some of which may include:
b) An analysis of the new market structure and its impact on market efficiency/integrity
IOSCO will provide an update on the progress of this work in mid-2012.
- help regulators to identify the practical impact that technological developments have had and the regulatory issues to which they may give rise;
- promote a consistent approach amongst global regulators to the latest technological developments; and
- mitigate the risk that technological change may pose to the integrity and efficiency of financial markets.
The Recommendations were developed in response to the G20 Leaders request in November 2010 that IOSCO should “develop recommendations to promote markets’ integrity and efficiency to mitigate the risks posed to the financial system by the latest technological developments”.
IOSCO Recommendations on Market Integrity and Efficiency
The Recommendations set out high level guidance to address issues in two specific areas:
Trading venue operators and trading participants
Recommendation 1: Regulators should require that trading venue operators provide fair, transparent and non-discriminatory access to their markets and to associated products and services;
Recommendation 2: Regulators should seek to ensure that trading venues have in place suitable trading control mechanisms (such as trading halts, volatility interruptions, limit-up-limit-down controls, etc.) to deal with volatile market conditions. Trading systems and algorithms should be robust and flexible such that they are capable of dealing with, and adjusting to, evolving market conditions. In the case of trading systems, this should include the ability to adjust to changes (including sudden increases) in message traffic;
Recommendation 3: All order flow of trading participants, irrespective of whether they are direct venue members or otherwise, must be subject to appropriate controls, including automated pre-trade controls. These controls should be subject to the regulatory requirements of a suitable market authority or authorities. In addition, regulators should identify any risks arising from currently unregulated direct members/participants of trading venues and, where any are identified, take concrete steps to address them;
Regulators
Recommendation 4: Regulators should continue to assess the impact on market integrity and efficiency of technological developments and market structure changes, including algorithmic and high frequency trading. Based on this, regulators should seek to ensure that suitable measures are taken to mitigate any related risks to market integrity and efficiency, including any risks to price formation or to the resiliency and stability of markets, to which such developments give rise.
Recommendation 5: Market authorities should monitor for novel forms or variations of market abuse that may arise as a result of technological developments and take action as necessary. They should also review their arrangements (including cross-border information sharing arrangements) and capabilities for the continuous monitoring of trading (including transactions, orders entered or orders cancelled) to help ensure that they remain effective.
IOSCO’s future work plan
In support of the Report’s Recommendations IOSCO will carry out work in the following two areas:
a) Development of recommendations on market surveillance
· IOSCO will assess the new challenges that technological changes pose for regulators in their market surveillance, which include: the fragmentation of markets; the dispersal of trading information; the increased speed of trading; and the ability to gather and process the increased volume of trading data. It will consider the feasibility of regulators having additional tools to deal with the challenges arising from market surveillance, some of which may include:
- additionalaudit trail or surveillance data consisting of all orders and trades by market participants in a given instrument;
- a single reporting point for all orders and for all transactions, by jurisdiction or geographical zone and across asset classes; and
- uniquelegal entity identifiers.
- In addition, IOSCO will build on its work on supervisory cooperation to consider how best to enhanceoperational contacts and cooperation between regulators in order to more flexibly share information and views for day-to-day market supervision.
b) An analysis of the new market structure and its impact on market efficiency/integrity
- IOSCO will analyse the evolving markets’ structure, in order to assess what specific issues such structural developments raise with regard to market efficiency and integrity; and consider whether and what recommendations may be needed to address any risks.
IOSCO will provide an update on the progress of this work in mid-2012.