Institutional Mechanisms for Identifying and Deterring Market Abuse in Asset Management
Introduction:
Asset management companies (AMCs) play a crucial role in the financial markets, handling vast amounts of capital and making investment decisions that can significantly impact the market. With such responsibilities, AMCs will now have to put in place institutional mechanisms for identification and deterrence of potential market abuse, including front-running and fraudulent transactions in securities.
The Securities and Exchange Board of India (SEBI) on August 05, 2024, issued a circular regarding the institutional mechanism by Asset Management Companies for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities.
SEBI mandated that AMCs set up comprehensive surveillance systems, internal controls, and escalation procedures to identify, monitor, and address misconduct. The circular also instructs the Association of Mutual Funds in India (AMFI) to ensure consistent implementation of these mechanisms across the industry, with AMFI required to issue detailed implementation standards within 15 days.
The circular states, “The detailed implementation standards issued by AMFI shall mandatorily be followed by all AMCs.”
Understanding Market Abuse:
Before delving into the mechanisms, it’s essential to understand the types of market abuse:
- Front-running: A form of market abuse where a trader executes orders knowing of pending orders that will influence market prices.
- Fraudulent Transactions: Trades conducted with the intent to deceive or manipulate the market.
Institutional Mechanisms for Prevention and Detection:
AMCs employ a multi-faceted approach to tackle market abuse. Here’s a closer look at the key mechanisms in place:
- Accountability: The CEO/MD and Chief Compliance Officer of each AMC will be held responsible for implementing the institutional mechanism for deterrence of potential market abuse, including front-running and fraudulent transactions in securities.
- Alert-based Surveillance: AMCs must develop and implement systems and procedures to generate and handle alerts promptly.
- Processing Alerts: AMCs need to review all recorded communications, including chats, emails, access logs, and CCTV footage (where available), and maintain & monitor entry logs to their premises.
- Standard Operating Procedures: AMCs must establish written policies and procedures to investigate and address potential market abuse including front-running and fraudulent transactions in securities by its employees and connected entities, with board approval required.
- Action on Suspicious Alerts: AMCs must take appropriate action against employees or brokers/dealers suspected of market abuse, including possible suspension or termination.
- Escalation Process: AMCs must have a process to inform their board of directors and trustees about potential market abuse and the outcomes of investigations.
- Whistleblower Policy: AMCs must implement a documented whistleblower policy.
- Periodic Review: Procedures and systems must be reviewed and updated regularly.
- Data Sharing: Stock exchanges and depositories should work with AMFI to develop systems that facilitate data sharing with AMCs.
- Reporting to SEBI: AMCs are required to report all examined alerts and the actions taken to SEBI in their Compliance Test Report (CTR) and Half-yearly Trustee Report (HYTR).
Conclusion:
The prevention and detection of market abuse, including front-running and fraudulent transactions, are paramount for maintaining market integrity and investor confidence. Asset management companies must leverage a combination of compliance programs, surveillance systems, pre- and post-trade controls, whistleblower policies, audits, and regulatory cooperation to create a robust defense against market abuse. By implementing these mechanisms, AMCs not only protect their own interests but also contribute to a fair and transparent financial market environment.
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