Few Firms Fully Ready for MAR07.01.2016
The majority of firms, especially smaller companies and the buyside, are largely unready for the new market abuse regulations from the European Union which come into force on 3 July.
The Market Abuse Regulation and the Directive on Criminal Sanctions for Market Abuse extend regulations from equities into other asset classes, explicitly ban the manipulation of benchmarks such as Libor for interest rates, and reinforce the investigative and sanctioning powers of regulators.
Stefan Hendrickx, founder and executive director at Ancoa told Markets Media that the firm, which provides contextual surveillance technology, has been been working with clients over the past 12 months to get them ready for MAR. He said banks and brokers are largely more ready than the buyside who are new to this type of surveillance.
Hendrickx added: “The readiness of the financial industry is fairly low across the board but the Financial Conduct Authority had said this is acceptable on day one as long as firms have a clear implementation plan.”
The European Commission said the Market Abuse Regulation ensures that rules keep pace with new trading platforms and new technologies, such as high frequency trading. The directive requires the 28 member states of the European Union to introduce common definitions of criminal offences of insider dealing and market manipulation, and to impose maximum criminal penalties for the most serious market abuse offences, including the manipulation of benchmarks.
Vera Jourová, commissioner responsible for justice, consumers and gender equality, said in a statement: “Administrative authorities will now have greater powers to investigate market abuse and to impose significant fines, while those found guilty of market abuse will be deterred by the prospect of facing jail.”
The incoming regulations extend the need for surveillance from equities into all other asset classes, except spot foreign exchange. Hendrickx said Ancoa has been developing more sophisticated scenarios, for example, after talking to prop traders about how options can be used for market manipulation in the real world and how to spot manipulation in fixed income which have request-for-quote markets rather than a central order book.
“Human intelligence is just as important as the automated alerts,” he added. “We provide all the data visualised on one screen so trends can be easily analysed – whether by client, desk or strategy.”
Colin Berthoud, founding Partner at TIM Group, told Markets Media that the fintech company, which provides software to capture investment recommendations, has 140 sellside clients in Europe and only one fifth will be fully ready by July 3, although the remainder have implementation plans. He said part of the reason for the lack of readiness is that the European Commission only endorsed the new rules in March.
Berthoud said the new regulations will include sales people and sales trader “experts” for the first time, while the previous rules were designed for equity research analysts. In addition “experts” will also cover traders on the buyside.
He added: “From 3 July sales people and sales traders will need to record and disclose all the investment recommendations they make to clients, whether made by phone, email, instant message, or broadcast.”
For the first time sales people and sales traders have to record and disclose a 12-month personal history of investment recommendations and record and disclose whether the salesperson, or anyone affiliated to the sales person, has a personal conflict of interest affecting the recommendation. This is time-consuming as in equities, for example, some sales specialists make hundreds of recommendations each day.
Berthoud said: “The new regulations are also extraterritorial and affect all trades in Europe, for example US treasuries, regardless of where the trader is located.”
He added that the FCA has confirmed that investment recommendations on all instruments traded in Europe are covered, even where the instrument’s primary listing is outside Europe, and where the broker and client are based outside Europe.
TIM Group has incorporated a set of screens across asset classes in its platform to allow affected staff to enter their recommendations rapidly after phone conversations, and where relevant in bulk, and make the disclosures to their clients automatically.
Berthoud continued that the mandate to record recommendations could provide long-term benefits as it will be possible to demonstrate more of the value that sales people and sales traders bring to clients. This will become increasingly important under MiFID II, which comes into force in 2018, and places an emphasis on firms providing evidence on how they have met best execution requirements and that they have assessed the quality of research they use.
Dermot Harriss, at OneMarketData, told Markets Media that the MAR deadline is the start, not the end, of a long story. He said: “Some firms have gone out and bought commercial solutions that have caused problems as they do not include market data. They are not thinking things through in a coherent way and realising that they can use the same data for many regulations at once, including trade reporting and best execution.”
Less than two weeks ago law firm Linklaters said fewer than 5% of listed companies felt completely ready for MAR and 21% felt they do not stand a chance of being able to comply in full by the date of introduction.
“This is partly because there are a number of issues regarding how the rules should work in practice which remain unresolved and partly because not all of the final rules and guidance have been published,” said Linklaters in a statement.
Linklaters added that new rules affecting listed companies in the EU relate to disclosure of inside information, insider lists, senior managers’ dealings and market abuse.
“The new rules are similar to those existing for Main Market companies, but with some notable differences,” added Linklaters. “In particular there are a number of new and prescriptive procedural requirements which will require significant forward-planning.”
Simon Branigan, Linklaters corporate partner, said in a statement: “The reality is that market practice is likely to develop over a number of months following the introduction of MAR.”
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