JPMorgan’s Record Spoofing Settlement Spotlights Dangers of Ineffective Supervision Policies

JPMorgan Chase was slapped with a $920 million mega-fine after the US bank failed to detect a group of employees manipulating markets by trade spoofing, underscoring the huge risks financial institutions face if they are not properly supervising and reviewing their electronic communications.

The Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges against JPMorgan for deceptive trading practices that spanned at least eight years and involved hundreds of thousands of spoof orders in the precious metals futures and government bond markets.

The size of the penalty was in part due to JPMorgan’s failure to provide sufficient supervision of its employees to adequately identify, investigate and stop the misconduct. It was the largest fine ever imposed for trade spoofing—essentially a practice where traders place fake orders that they never intend to fulfil so they can profit from the resulting market moves.

“This action sends the important message that if you engage in manipulative and deceptive trade practices you will be caught, punished, and forced to give up your ill-gotten gains,” said James McDonald, division of enforcement director at the CFTC.

How can your financial institution protect itself against such misconduct and avoid suffering the same costly fate as JPMorgan?

The answer is through effective supervision policy management across all of your electronic communication (e-comms) platforms so you can proactively identify and respond to any potential wrongdoing before it has an opportunity to escalate.

“Firms that detect wrongdoing and self-report are fined significantly less than when an examiner or a regulator uncovers it,” said Donald McElligott, VP for compliance supervision at Global Relay. “With new forms of communication, it highlights the need for better policies across the board—not just in email but in the many other ways these markets could be manipulated by traders meeting online or in chat rooms.”

This is a vital point, because if your traders have colluded with employees at another firm, and that firm catches and reports it first, then your firm is likely to be hit with a heftier fine because you have failed to self-report what it is going on.

Regulators have also emphasized that they will look for red flags within supervised channels that suggest that unsupervised channels are also in use. Once identified, your firm is exposed to serious risk if regulators subsequently find evidence of trading activity happening outside of your firm’s view.

Here are some top tips for setting up effective policies to monitor for trade spoofing:

• Location - before writing your policies, think about where these conversations are likely to take place so you are monitoring the right communication channels. With the proliferation of new collaboration platforms, firms need to ensure their policies are up-to-date and capturing all applicable data sources, regardless of the location of collaboration platform or employee.
• Keywords - think about how people will discuss engaging in this type of activity and the proximity of certain phrases. It’s unlikely they will say ‘hey, let’s do some trade spoofing’ (though you need to include the obvious terms just in case), so think about the language that captures the concept of running a false or dummy order and then cancelling it.
• Refining - help your reviewers by ensuring your policies are fine-tuned to eliminate unwanted noise. The word ‘trade’, for instance, can appear in a myriad of unrelated situations. Make sure you spend time carving out negative context so your policies are only flagging content that is relevant.

“The JPMorgan mega-fine serves as a real warning shot that regulators are prepared to severely penalize firms that don’t take their supervisory responsibilities seriously, and highlights the importance of ensuring your e-comms policy management is effective so that market abuses like trade spoofing can’t slip through the net,” said McElligott.

Learn more about how you can build and refine better trade spoofing policies by downloading our e-Book The Compliance Officer’s Guide to Financial Services Policy Management here or watching the accompanying webinar here.