Note: This post was originally published on LinkedIn in Jan 2024
This week the FCA have released an update on their focus of reducing and preventing financial crime. (https://lnkd.in/eB9-rqKX).
What the FCA report is silent on is the typologies of FinCrime, and some of the structural issues which can enable activities such as fraud to take place.
When SBF perpetrated fraud at FTX, he did so on multiple fronts as the correct guardrails were not in place. As the caretaker CEO, John J. Ray III stated: “Never in my career have I seen such a complete failure of corporate controls…”.
SBF, based on current convictions, committed multiple forms of fraud - Wire Fraud (Alameda transfers), Securities Fraud (Investors) and some Money Laundering too (KYC).
FTX was a vertically integrated service offering: Asset Manager, Broker, Exchange, Custodian etc. This vertically integrated typology, with a lack of appropriate governance arrangements, facilitated the flourishing of conflicts of interest. This culminated in a circa US$9 billion default.
To mitigate against the risk that this vertical typology presents, in traditional finance we decouple the transaction value chain into its constituent elements of: Trading, Clearing and Settlement.
Not only does this allow us to have a more rigorous approach around any potential conflicts of interest, it also allows us to test the resilience of each of the constituent elements of the value chain.
I found this paper from Optiver insightful on key lessons from testing financial market infrastructures. (https://lnkd.in/e9Xa4t5x)
And that is what working in a regulated, as opposed to an unregulated, environment gives you:
🎞 Transparency: who is doing what
💪 Resilience: how do we preserve the integrity of the system
⛑ Recourse: Where does the buck stop? The FCA makes this abundantly clear with the threshold CONDitions and SM&CR. (No room for virtual offices here!)
Financial crime does enormous damage to society. Each of us, as individuals have a role to play.
So stick with your trusted, and regulated, parties.
Note: This post was originally published on LinkedIn in Oct 2023
Product and Jurisdiction
Earlier this week the FT stated that the UK might be falling behind other jurisdictions on its crypto stance.
(https://lnkd.in/d2Uw6bVp)
But before reaching any conclusion, what is the context of this headline?
What it most certainly says is that the crypto space is evolving, both in terms of i) product (e.g. the 11 spot BTC ETFs approved by the SEC) and ii) participants (Blackrock, Fidelity, Invesco which are all familiar names).
(https://lnkd.in/d2UtUjpA)
This recognition of the changing status of digital assets is a global phenomenon. As Hong Kong’s SFC so elegantly states: “A broader range and a larger number of investment products are now available, and provide both retail and professional investors with exposure to virtual assets.”
(https://lnkd.in/d8tUmJsA)
The HK SFC circular goes on to highlight why the global regulatory landscape remains uneven. The entities people end up dealing with are i) at worst unregulated or ii) only regulated for AML/CFT purposes (in the UK think MLRs) or iii) subject to light-touch regulation (e.g. for payment purposes).
Who are these digital assets being distributed to?
In the UK the FCA defines 3 client types: Retail, Professional and Eligible
Counterparties
(FCA Handbook, COBS3 (Conduct Of Business Sourcebook)).
Each of these clients have their own ‘nature’.
And this is where it starts to get nuanced.
All of us, as individuals, are end consumers.
Sometimes I might choose direct ownership, but sometimes I choose an intermediary to act on my behalf.
For example, it’s ‘my’ pension fund – but I choose an intermediary, i.e. an eligible counterparty, to manage my investments.
What is important, is that I have a pathway to access the investment product of my choice or the product which I want exposure to.
In the FT article, Hector McNeil, co-founder of London-based HANetf, promotes the need for gating (suitability) and draws the conclusion that without any gate, the unintended consequence is to push people to unregulated crypto exchanges.
Gating is nothing new. (Back to COBS9A.2). Suitability is something intermediaries know how to do. It is not the product that determines the suitability – it is the nature of the client.
When we established GFO-X we thought long and hard about pathways to GFO-X. That included being in the existing regulatory perimeter. Futures and Options are specified investments in the UK.
Which is why we offer Futures and Options on a Benchmark Index.
And because GFO-X is a regulated MTF, it opens the pathway, for any professional investor or authorised counterparty, access to our market and to unlock the services they can provide.
(Pic: https://lnkd.in/dXWgZNPb)
