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The Crucial Role of Advanced Dealing Inventory in Market Abuse Risk Assessment

24 Oct 2024

With stringent regulations enforced by authorities such as the FCA and SEC, understanding firm-wide risks has never been more critical. Compliance teams face mounting pressure to effectively manage and mitigate risks associated with market abuse. Keeping a dealing inventory has proven indispensable for ensuring compliance and managing risks.


In my experience and over two decades of experience as a compliance professional, maintaining a robust dealing inventory is one of the most effective ways to streamline a firm’s Market Abuse Risk Assessment (MARA) and build a solid control framework. This article will explore why an advanced dealing inventory is vital and how it enables firms to monitor risks, comply with MAR, and implement controls that mitigate market abuse effectively.


What Is a Dealing Inventory?


At its core, a dealing inventory is a comprehensive document that captures all the critical details of how different trading desks within a firm operate. It serves as a central repository of information, providing insights into the firm’s trading activities and ensuring that compliance teams have a full understanding of the potential risks involved.


Why Is It Important?


A dealing inventory is crucial because it serves as the foundation for understanding a firm’s operations and identifying potential market abuse risks. Without this level of detailed insight, it becomes challenging to create effective control frameworks and monitor activities for signs of misconduct. Additionally, as regulations like MAR evolve, maintaining an up-to-date inventory ensures compliance teams are always equipped to respond to regulatory inquiries efficiently.


Understanding the Characteristics of Specific Business Units


Capturing Comprehensive Business Details


An advanced dealing inventory allows compliance teams to capture detailed characteristics of each business unit, offering a thorough understanding of the specific risk landscape across different operations. This is crucial for ensuring compliance with regulations such as the FCA’s MAR and the SEC’s equivalent rules.


Key areas to document in a dealing inventory include:


  • Product Types: Equities, bonds, derivatives, or commodities traded by the unit.

  • Trading Strategies: Market making, proprietary trading, or hedging.

  • Execution Methods: The ways in which trades are executed, including electronic trading platforms, voice trading, and algorithmic trading.

  • Market Venues: Exchanges, over-the-counter (OTC) markets, and Multilateral Trading Facilities (MTFs).

  • Geographic Focus: Jurisdictions and regions where the unit operates, with attention to regional regulatory variations (e.g., FCA in the UK vs. SEC in the US).

  • Client Relationships: Nature of relationships with clients and counterparties, especially in high-risk transactions.

  • Communication Channels: The methods used for trade communications, whether it’s email, phone, instant messaging, or specific trading platforms.


The Importance of Granularity


I’ve learned through personal experience that granularity is critical when developing an adequate dealing inventory. Early in my career, I realized that missing even small operational details could lead to significant blind spots in risk monitoring. By ensuring that no operational aspect is overlooked, compliance teams can identify unique risk factors that might otherwise be missed. Each business unit carries its own specific risk exposures, which must be carefully monitored under MAR and other regulatory frameworks. Additionally, tailoring control frameworks to each unit's particular operations and obligations is essential for effectively mitigating these risks. Just as important is ensuring data completeness—comprehensive data allows surveillance tools to detect market abuse across all products, trading venues, and communication channels while creating a robust audit trail for investigations and regulatory reviews. Maintaining this level of detail ensures that the firm stays in line with regulatory compliance, providing a deep understanding of each unit’s activities and ensuring the business is well-prepared for regulatory scrutiny.


Driving Key Market Abuse Risks Monitoring


Linking Business Characteristics to Market Abuse Risks


I would like to highlight several compelling reasons why maintaining a comprehensive dealing inventory is essential for identifying potential market abuse risks. This inventory allows us to focus our surveillance efforts on the areas that are most critical. By thoroughly understanding the specific business characteristics of each unit, we can effectively map out risk areas such as insider trading, spoofing, or market manipulation that pertain to their operations.


Additionally, the dealing inventory enables scenario testing, where we can simulate how particular business activities might lead to market abuse. This process helps us refine our risk assessment models and ensures that we are prepared for various potential scenarios.


Furthermore, by identifying and prioritizing risks, we can concentrate on the most critical issues in accordance with the Market Abuse Regulation (MAR) and the regulations set forth by the FCA and SEC. This ensures that our resources are focused on the areas of highest importance.


Enhancing Surveillance Capabilities


How can we best adapt our compliance framework to a dynamically changing business environment? Having a detailed understanding of each business unit's activities was instrumental for me. This insight allowed my team to customize surveillance tools to monitor the specific risks associated with each unit. We tailored our systems to track patterns that might indicate insider trading, spoofing, or other forms of market manipulation. Additionally, we set up real-time alerts, which enabled compliance teams to receive immediate notifications of suspicious behavior. This ensured quick responses and minimized potential damage.


As the business evolved, our systems needed to evolve as well. Regular updates to the dealing inventory allowed us to continuously adapt our surveillance efforts to address emerging risks and maintain compliance with the Market Abuse Regulation (MAR) and other regulatory requirements.


Impact on Control Frameworks and Risk Mitigation


Designing Effective Control Frameworks


I recall a notable example when my team had to tailor the control frameworks around a significant merger and acquisition (M&A) deal, which presented a unique set of challenges. Managing Material Non-Public Information (MNPI) was crucial during this transaction. We also needed to ensure that the interest rate swap (IRS) traders' hedging activities did not inadvertently influence market behavior, particularly concerning manipulating primary markets and reference screens.


My compliance team collaborated closely with the M&A and trading desks in this scenario. The deal involved the acquisition of a European firm by a U.S. company, requiring careful oversight of financing and hedging activities. The M&A team led negotiations while the Funding team worked on a mix of debt and equity financing. Since the deal’s financing included euro-denominated bonds, the foreign exchange (FX) desks executed cross-currency swaps to hedge currency risks.


We knew the IRS traders responsible for hedging interest rate risks posed a specific compliance challenge. If their hedging activities were not closely monitored, they could manipulate primary markets or impact key reference screens, creating regulatory risks. My team established strict controls around MNPI to mitigate this, ensuring that sensitive information was adequately ring-fenced. We also implemented enhanced trade surveillance, focusing on real-time monitoring of hedging activities to detect any suspicious market movements or potential manipulation of interest rate reference screens.


Through regular updates to our dealing inventory and continuous communication between the M&A, trading desks, and compliance teams, we adapted our surveillance tools to meet the deal’s evolving needs. This approach allowed us to effectively address emerging risks, maintain compliance with Market Abuse Regulation (MAR), and prevent inadvertent market manipulation during hedging. Using a well-designed dealing inventory is essential for aligning a firm’s control framework with its specific risk profile. One of the main advantages is the reduction of false positives. A structured inventory allows our surveillance efforts to concentrate on real risks, resulting in fewer unnecessary alerts and more efficient monitoring.


Additionally, a comprehensive dealing inventory is crucial for enhancing regulatory compliance. When regulators, such as the FCA or SEC, evaluate the firm, demonstrating a proactive and organized approach to risk management under the Market Abuse Regulation (MAR) shows our commitment to compliance.


Finally, maintaining a robust dealing inventory is vital for mitigating reputational risk. By reducing the chances of non-compliance or enforcement actions, we protect the firm’s reputation and standing within the industry.


Advanced Dealing Inventory: A Pillar of Efficient MARA Workflow


Streamlining Compliance with SaaS Solutions


One of the biggest challenges I've faced in my compliance career is managing a Market Abuse Risk Assessment (MARA) using outdated, manual processes, particularly Excel-based systems. While these methods may have been influential in the past, they now create more problems than solutions. Relying on spreadsheets and manual data entry leads to inefficiencies, introduces human error, and creates an overwhelming bureaucratic burden with a never-ending paper trail. More critically, these outdated methods make it nearly impossible to maintain an adequate dealing inventory to keep pace with modern financial markets' complexities.


With the constantly evolving regulatory landscape, compliance teams must be able to handle slow, manual processes. A robust compliance framework depends on real-time insights, and managing these through Excel results in a reactive approach that could be more efficient and risky.


This is where AssessLens comes in. Explicitly designed for Market Abuse Risk Assessments (MARA), our SaaS solution transforms how firms manage their compliance workflows. By automating data collection and analysis, AssessLens enables compliance teams to focus on addressing the most critical risks, freeing them from the administrative burden of manual tasks. Furthermore, it guarantees data integrity, providing accurate, up-to-date information across all business units—an essential requirement for an advanced dealing inventory.



Our solution is built for scalability. AssessLens can easily adjust to new risks and controls as your business grows or adapts without requiring extensive manual intervention. This flexibility is essential in today's fast-paced environment, where regulators like the FCA and SEC continually increase their expectations.


In short, leveraging an advanced dealing inventory through AssessLens allows firms to streamline their MARA workflow. This ensures compliance teams meet regulatory requirements in the most efficient and proactive manner possible. This level of integration supports comprehensive risk management, empowering firms to build a robust control framework that effectively mitigates market abuse risks while remaining aligned with regulatory standards like MAR.


By embracing a solution like AssessLens, firms can finally move away from the inefficiencies of outdated methods and focus on what truly matters: protecting the firm’s integrity, meeting regulatory obligations, and staying ahead of emerging risks.

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