So far in our series, we have looked at monitoring concerns and pre-trade and post-trade controls that the Financial Conduct Authority would like to see private banks operating in relation to market abuse. This instalment looks at the whole trading control spectrum.

Once you have thought about your pre-trade and post-trade controls and your business “life cycle,” the next thing to do is to think about those controls a bit harder. You should be asking the following questions.

• How do I know that the controls we put in place are working, especially if they are automatic system controls?

• When were the automatic control rules last reviewed and updated?

• Are our automatic system controls based around guideline restrictions and PA (personal account) dealing requests or do they also consider clients' details and the manipulation of transactions (i.e. participation in transactions or orders to trade that give people a false impression of the value of an investment and/or affect the price of it artificially)?

• What are the exception reports actually telling me about particular people or desks?

• Am I seeing any correlation between phone calls or Bloomberg chat and dealing that is of concern?

Put yourself in the shoes of somebody who might actually like to undertake some abuse. How easy is it to get around the system? Sometimes, as I have seen, people use hard-coded rules in a portfolio management system. It is a good way to generate exception reports for them to look at, but those reports tell them nothing because nobody was updating the system when the portfolio managers were moving positions or securities were appearing on and disappearing from lists.

The tone at the bottom

You must not necessarily assume that your pre-or-post-trade controls are working properly. You must go back and test them. When you look at the Bloomberg chat or the phone calls, make sure that you are not doing so to resolve one particular event. Instead, you should be dipping in and out frequently to obtain a sense of what your dealing desks are actually saying and doing. During the Libor and the FX scandals, compliance officers could have picked up plenty of chatter that showed that people were acting inappropriately but they were not reviewing data in that way – perhaps they were only looking for key words.

The compliance officer ought to draw on human intuition. Exception reports and systems are good, but systems tend to concentrate on events. They can tell you whether a single trade is acceptable according to a guideline or whether it falls foul of a stoplist, but they are not good at looking at more than six months. The compliance officer can come in here and ask questions – about what this-or-that portfolio manager has done; how many times he has made PA deal requests that have been approved or not approved, how often he has invested in something that was within the client's investable universe but not involving the clients in it? You ought to think of concentrating less on events and more on trends that concern portfolio managers, desks, derivatives, dealing frequencies, trading after a stop-list block, sectors and/or anything else you think important or applicable to you.

Be informal

The Financial Conduct Authority's Market Watch 48 said, among other things, that sometimes the approval processes at firms for PA dealing (or even for reporting problems with dealing) were too formalised. Make sure that you know who your investment staff are and what they're dealing in and make sure that they know who you are and that they feel that they can come and talk to you without it being a big deal. If they can run something by you without a fuss, you will have a much better relationship with them. You will then be much more likely to find out about a problem than if you spend all day sampling information.

* Hardly any private bank or asset manager can impose all the pre-trade and post-trade controls enumerated in this series, so in the next episode Beth Cazalet (reachable on +44 (0)20 7620 8440) will suggest ways in which financial firms can make slender resources go further while still pleasing the regulators.