The main objectives of securities regulation around the world is to protect the integrity and fairness of the markets. Without the assurance and enforcement of rules and regulation governing trading activity, investors would not be able to transact confidently without the information nor the knowledge that the prices they obtain accurately reflect the perceived value. Market surveillance is aimed at identifying potential abusive and illegal trading practices in the securities markets as a result of unfair access to information and attempts to distort prices or to mislead market participants. 

As such, it is a critical input into ensuring market integrity. Without the confidence in the integrity of our markets, we cannot compete effectively internationally for investor capital. I am sure I do not have to tell you about the challenges that we face as an emerging market. Given that there are so many factors affecting our markets that we cannot control, it is important that we pay sufficient attention to those that we can. Ensuring effective market surveillance is one of those factors in our control.  

A broad review of the Financial Markets Act is underway and is at a critical juncture. We can expect that during the course of the year, the National Treasury will make a draft available to the market for input and comment. However, the regulatory framework has already changed through the COFI Bill, which anticipates that the FSCA as the securities regulator will play a bigger role in the licensing and supervision of market participants. This signals that the role of the regulator and the current self-regulatory or SRO model is changing.

In South Africa, the FMA makes licensed trading venues responsible for the supervision and surveillance of trading and transactions on the trading venue in compliance with its trading rules and the provisions of FICA. It requires a licensed trading venue to enforce the trading venue rules, listing requirements and trading venue directives. It also requires that the trading venue rules must provide for the manner the trading venue monitors compliance by its authorised users with the FMA and the trading venue rules and trading venue directives.

As is clear from the regulatory framework, the FMA does not envisage a direct role for the FSCA in market surveillance. Trading venues investigate potential breaches and suspicious activities and notify the FSCA Market Abuse team of matters requiring investigation. The Market Abuse team assesses trading venue data for the purposes of investigation. In addition, under an agreement concluded between the FSCA and the trading venues, the trading venues report any contravention of the FICA by authorised users to the FSCA, the supervisory body, for enforcement action.

The FSCA recently conducted SRO inspections on all exchanges to understand how developed the function is, its complexity and what challenges and gaps exist. In some cases, the onsite inspections were conducted with the Market Abuse team. While the reports are still being finalized, the inspections have provided useful insights into how complex the responsibility is, and how cost and resource intensive. The team has identified gaps across the board, but particularly at smaller institutions. We expect that the same scenario will apply to the universe of authorized users and wish to do some dipstick testing in the year ahead. As we have not done this before, we will work with the exchanges to undertake these exploratory engagements. We see this as our broader supervisory role to test the effectiveness of the SROs and to understand where the current model has weaknesses.

With its establishment as a new regulator in 2018, the FSCA anticipated that it would have a market surveillance function. The intention was to begin with cross-market surveillance due to market fragmentation resulting from the multi-trading venue landscape in South Africa (the same securities being listed on more than one licensed trading venue). This would require us to develop a consolidated surveillance system in close consultation with the industry, linked to a central data platform (hosting pre- and post-trade and other data as agreed), to be located at the FSCA. Each trading venue would be required to send its pre- and post-trade data to the central data platform for the purposes of cross-market surveillance. In other jurisdictions, additional data includes short selling information and information from investment providers.

We have witnessed the power of technology, with trading venues becoming more automated, fed by more sophisticated trading system that generate greater trading volumes at greater speeds. We have also seen a proliferation of trading venues, making it more and more difficult to monitor transactions. As a result, markets have become more vulnerable to inappropriate activity. This means that the market surveillance value chain needs to become more effective at detecting irregular patterns and behaviours and requires us to collectively focus resources on it.