FINRA Issues Guidance on Best Practices for Detecting and Preventing "Rogue" Trading
Washington, DC — The Financial Industry Regulatory Authority (FINRA) issued guidance to firms outlining best practices for detecting and preventing unauthorized proprietary trading, often called "rogue" trading. The Notice comes in the wake of several recent cases involving allegations of unauthorized trading that resulted in substantial losses by firms both in the United States and abroad.
"The risks associated with unauthorized proprietary trading are not new, and most firms that allow traders to commit the firms' capital already have policies and procedures in place to prevent unauthorized trading," said FINRA CEO Mary L. Schapiro. "But recent events highlight the importance of routinely and rigorously assessing the adequacy and efficiency of those systems - particularly in light of the increasingly global nature of the financial services industry, the highly competitive trading environment and the complexity of many of the products being traded."
FINRA's Regulatory Notice 08-18 is intended to assist firms in the process of reviewing and, where necessary, modifying internal controls against unauthorized trading. The guidance was formulated after soliciting input from a range of firms regarding their internal controls. While FINRA believes the practices outlined in the Notice are worthy of consideration, their relevance and feasibility will vary depending on a firm's size and business model.
Sound practices detailed in the Notice include: heightened firm scrutiny of red flags such as trading limit breaches, unrealized profit and loss on unsettled transactions, unusual patterns of cancellations and corrections, a pattern of aged fails to deliver; increased password security and other protections of firm systems and risk management information; and creating a stronger compliance culture within the firm.
Detailed information about the practices discussed in Regulatory Notice 08-18 is available on FINRA's Web site at www.finra.org.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business-from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.