Wholesale Market Conduct – Central Bank of Ireland expectations in a changing environment - Remarks by Patricia Dunne, Director of Securities and Markets Supervision

Good morning everyone, I would like to thank Grant Thornton for inviting me to this event. I really welcome the opportunity to discuss the important topic of Wholesale Conduct Risk. This invite was timely given a number of recent and ongoing supervisory initiatives in this area. 

In my remarks this morning, I will reflect on the key principles that guide the Central Bank’s supervision of securities markets and matters arising from the Regulatory & Supervisory Outlook Report issued earlier this year. I will also discuss a number of recent and ongoing supervisory assessments, and I will conclude by sharing some thoughts and insights on a recent enforcement action and Central Bank surveillance capabilities.                 

In recent years, the financial markets landscape has undergone profound changes, with technological advancements, shifting investor behaviours, regulatory reforms, and hybrid-working reshaping the manner in which securities markets are accessed and serviced.

Despite these changes, the principles that guide the Central Bank’s supervision of securities markets have not changed. We strive for:

The importance of wholesale conduct risk management in delivering on these principles cannot be overstated. It is not merely a regulatory requirement; it is a fundamental component of maintaining trust, integrity and stability within our financial markets. 

Regulated entities play a critical role in upholding market integrity. Each of your firms market conduct risk frameworks play a crucial role in enabling this. Having effective risk management requires a multi-faceted approach encompassing comprehensive risk identification and assessments, robust governance, proactive monitoring, timely MI and continuous improvement. 

We recognise that firms might have ambitious growth strategies and must keep pace with a rapidly changing environment.  This however will place greater demands on risk and control management frameworks; increase your reliance on surveillance systems and a greater need to produce relevant and timely MI.  Critically firms must ensure that their risk and control frameworks are continuously adapted to keep pace with evolving business models and strategies.  

One of the key supervisory priorities highlighted in the Central Bank’s 2024 Regulatory & Supervisory Outlook Report was that “Firms address deficiencies identified in their governance, risk management and control frameworks to ensure they are effective, both in the current environment and into the future.” 

Another supervisory priority that we highlighted was ‘proactive risk management’ and that firms adopt a more proactive and forward-looking approach to managing risks. The Central Bank has consistently messaged its expectation in this regard. For example, even if we look back to our industry communications in March 2019, we indicated that firms, their Boards and senior management must be proactive in their approach to wholesale market conduct risk management, and that they should take all necessary steps to ensure that these risks are understood, mitigated and managed appropriately. 

The Bank has been focussed on wholesale market conduct risk since 2019 and has engaged extensively with industry.  While we have seen improvements in some investment firms, particularly smaller ones, we continue to have significant findings in relation to risk management frameworks in other larger firms.  

We recently completed an assessment of firms’ conflicts of interest frameworks, which found that firms did not have a comprehensive documented view of all relevant risks they are exposed to.  

We also found that some firms were unable to demonstrate sufficient awareness of the potential conflicts arising in their business models and map associated mitigating controls to the applicable risks. As a result, firms are left vulnerable to unforeseen threats that may jeopardize not only their own stability and reputation but also that of the market as a whole. 

Our review of conflict of interest also identified common governance failures, relevant policies and procedures were outdated, and not subject to a formal, systematic review to ensure they remained fit for purpose and commensurate with the scale and complexity of the firm’s business and activities. 

What does good look like in this space - We expect that firms regularly carry out a formal assessment of their wholesale conduct risk, with specific and actionable risks identified and associated controls designed to mitigate these risks. 

Looking specifically at those entities that may be part of a wider group a number of recent assessments have raised concerns that some entities are ‘takers’ of group risk identification and controls design processes. This positioning places a high level of reliance on the group to identify conduct risks applicable to its business, and to set and remediate appropriate controls.  Even following group regulatory events, local entities failed to undertake proactive, formal risk assessments at a legal entity-level in connection with market conduct risk events or consider how these events may impact their entity specifically. The absence of such entity-level risk assessment places local firms, Boards and senior management at risk of being unaware of market conduct risks and associated control deficiencies applicable to it at a legal-entity level. 

Again, what does good look like here – the Bank’s expectation is that boards and senior management are proactive in their approach to wholesale market conduct risk management at a local, legal entity level.  

Ongoing Assessment

It is essential that firms have in place effective systems and controls to mitigate and manage the risks arising from its trading activity. Previous market events have shone a light on the market impact of ineffective pre-trade controls for both manual and algorithmic trading activity. This risk has been identified both in the Central Bank's own risk scanning exercises, and as a supervisory focus at a European level by the European Securities Markets Authority (‘ESMA’). Our supervision team have recently commenced a Thematic Assessment of Pre-Trade Controls. This Assessment will examine firms’ frameworks for the establishment, operation and oversight of pre-trade controls and will seek to identify how investment firms have implemented overarching pre-trade control frameworks for both manual and algorithmic trading. 

As mentioned previously, this is an area of focus for ESMA and in January of this year, ESMA launched a Common Supervisory Action (‘CSA’) with the objective of assessing the implementation of pre-trade controls by EU investment firms using algorithmic trading techniques. Findings from the Central Bank’s Thematic Assessment will feed into the our response to the ESMA CSA. 

While the Thematic Assessment has not yet concluded, there are a number of high-level preliminary findings, which I can highlight today. The Assessment has identified shortcomings in the overall documentation of the pre-trade control frameworks and associated control environments in firms. Inadequacies have also been identified in the areas of control testing and reporting, as well as the calibration and periodic review of the controls themselves. In certain firms, the Assessment has identified a lack of management awareness or ownership of pre-trade control frameworks and the risk environment associated with firms’ markets activities. We will communicate further on this review once finalised. 

I had previously mentioned that given the growth in securities markets activity in this jurisdiction, the Central Bank made a decision to acquire a new market leading trade surveillance tool. This system is now being embedded in our overall market integrity surveillance framework and has strengthened the Bank’s capabilities in its surveillance of market activity. We can now seamlessly integrate i) order book data from a number of different venues and Multilateral Trading Facilities across Europe, ii) MiFiR Transaction Reporting data, iii) Relevant market news, and iv) reference data, for the purpose of scrutinising activity. We also have one eye on the future with the Markets in Crypto Assets Regulation and the tool incorporates capabilities for crypto trading surveillance.     

We do not work in splendid isolation and through international co-operation Regulators share crucial intelligence in our efforts to combat misconduct in our markets. On the domestic front, we have enhanced our working relationships with the Garda National Economic Crime Bureau and there is strong inter-agency collaboration. The recent Insider Dealing case before the courts speaks to this.            

Let me conclude.

The importance of a robust structural framework for assessing wholesale conduct risk (or indeed any risk) cannot be overstated. Invariably if the structural frameworks are not robust, the specific risks and controls will falter.   

The recent enforcement action for breaches of the Market Abuse Regulations underscore this point. In the public statement relating to that enforcement action, we highlighted deficiencies in 

At the outset, I touched on the changing landscape of financial markets, however the principles we are looking to satisfy in our supervision of securities markets and our expectations have not. The effective management of conduct risk is central to the integrity of our markets and we all collectively have a key role to play in that regard.

I will now open the floor to any questions that you may have.