The sector in brief
An exchange runs a market where securities, commodities or other instruments are traded. Market institutions and exchanges are supervised by the authority of the jurisdiction where they operate, and include securities markets and commodity exchanges.
Most of the relationships with end investors sit with the brokers who trade on the exchange. The exchange's relationships are with its members, listed companies and other participants. Its AML role is therefore to decide who is allowed in, to watch what they do and to act when something does not look right.
Strong admission standards and effective surveillance protect more than the exchange. They protect the integrity of the market and the reputation of the country as a place to do business.
Where the risk sits
Admission of weak members
A member with poor controls, or with owners of doubtful background, can bring risk to the whole market.
Listings of doubtful issuers
A company with hidden owners or a thin business can use a listing to raise money and give itself a veneer of legitimacy.
Manipulative trading
Trades that do not reflect real interest, such as wash trades or cross-trades between connected parties, can create false prices or move value.
Cross-market and cross-border activity
Activity that links several markets and countries is harder to see from the point of view of one exchange.
Sanctions
Participants and issuers must be screened, and action must be taken without delay if a sanctioned person is involved.
Who supervises you
It depends on the market. Securities and commodities exchanges onshore are supervised by the Capital Markets Authority, and exchanges and market institutions in the DIFC by the DFSA. Check which authority recognised your institution and what its guidance says for market operators.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A compliance officer or MLRO with authority to refer concerns, and board oversight of the AML programme.
- A risk assessment of members, issuers, products and the geographies involved.
- Due diligence on applicants for membership and listing, including owners, controllers and AML programmes.
- Ongoing review of members and issuers, and a way to raise and track concerns.
- Market surveillance that detects suspicious trading, with a route to share alerts with the supervisor and other authorities.
- Screening of participants against sanctions lists and action on matches.
- Reporting through goAML where suspicion arises, training, record keeping and independent testing.
Red flags to watch
- An applicant whose owners are unclear or whose background has not been checked.
- A member with repeated surveillance alerts that are not resolved.
- Trading between accounts with common control that has no commercial reason.
- A listing applicant with a business that cannot be verified.
- Sudden changes in ownership of a member or issuer.
- Participants that resist requests for information.
A worked example
Cross-trades between connected accounts
Surveillance flags repeated trades in a thinly traded security, always between the same two accounts at prices slightly above the last trade. Both accounts belong to members, and the exchange finds that they have a common director. The exchange asks both members for an explanation, reviews the trades, tells the supervisor and considers whether the activity indicates market abuse or the movement of value between connected parties. If it concludes that it does, the compliance officer considers a suspicious transaction report.
How Adventant helps
Questions answered
Does an exchange have to identify investors?
Usually the relationship with the investor sits with the broker. The exchange's duty is to make sure that members meet proper standards and to watch the market. The detail depends on the rules that apply to your institution.
How is AML different from market surveillance?
Surveillance focuses on market abuse such as manipulation and insider dealing, while AML focuses on the source and movement of funds. They overlap, and sharing information between them improves both.
What should listing due diligence cover?
The issuer's owners and controllers, its business, its finances, the source of capital and any adverse information. The depth depends on the risk.
Can an exchange suspend a member?
Within its rules and powers, yes. Having a clear and consistently used process for dealing with concerns is part of a credible programme.
Who should an exchange tell about a concern?
Its supervisor, and where the rules require it, the Financial Intelligence Unit through goAML. The internal process should say who decides and how quickly.