The global economic upturn means vastly expanded opportunity for some entities, but also increases the possibility and scope of unfair exploitation of the markets, financial and otherwise, they operate within. Market abuse regulation (MAR) exists to keep those playing fields even across the multiple sectors and economies where a modern enterprise operates simultaneously.
This post is meant to briefly explain market abuse, how its regulation works and the best practices to manage compliance. Together, these can leave your entity carefree and satisfied, as all its operations will be up to the standards of each market it operates within.
What is market abuse?
Market abuse is defined as behavior that intentionally harms the integrity of markets. Most frequently, this takes two forms: insider trading and market manipulation. Insider trading is well known as the use of knowledge not available to other investors in order to profit from trading in financial instruments. Market manipulation can take different forms, but some examples include when an investor artificially drives up trading volumes, and then unloads shares in order to profit; or the reverse of insider trading, spreading misleading information in order to drive prices down on the expectation they will increase in the future.
Brexit, if anything, makes it more important for entities with interests in the UK, as well as in the remaining EU countries, to tighten up their practices where market abuse is concerned — because now they may be dealing with an extra set of regulations.
British, European, US and other law aims to tighten and increase penalties for market abuse while clearly defining the scope and exemptions. Everyone knows, more or less, what insider information is, but the MAR framework in the EU, for example, extends the penalties of using it to activities that include amending and canceling an investment, as well as encouragement or inducement of other parties. Under the market manipulation category, benchmarks (following the LIBOR scandal) are now included, as are attempted but unsuccessful attempts to influence prices.
Regulations to enforce market abuse penalties most frequently include requiring large firms to keep lists of everyone in their employ who has access to inside information, requirements to report suspicious transactions or orders to regulators, and requirements to maintain an objective presentation while recommending investments at the same time as the party discloses any conflict of interest. Firms also must have established best practices for whistleblowers to come forward without fear of retribution.
5 Best Practices for MAR Compliance
The following constitutes a brief description of each of the essential aspects of a sound MAR compliance framework that firms should be looking to adopt or strengthen.
1) Data availability
While a single, universal taxonomy of market abuse does not exist, most firms recognize a consistent list of abusive or manipulative behaviors as those prohibited by EU MAR, which include spoofing, ramping and front-running. However, monitoring for the behaviors becomes increasingly onerous when considering the differing manifestations across different trading instruments, venues and regions.
Availability of data is a challenge. Leaving aside firms’ individual data challenges, information required to undertake monitoring is difficult to obtain and to keep track of. For example, if reliable market price data is not present, it is very difficult to identify behaviors pertaining to manipulation of prices to an off-market level. This raises the stakes for having the best, most comprehensive software platform, which can identify potential market abuse as it happens.
2) Detection capability
The wide-reaching nature of MAR has driven firms to focus on the rapid expansion of surveillance coverage: more behaviors, more products, more regions. However, expansion has often come at the expense of the effectiveness or efficiency of detection capabilities. The intricacies of detection models must be appropriately considered; otherwise, the resultant models end up severely limited.
3) Risk assessment
The risk assessment process is a subjective one, but to ensure an outcome that is most representative of the true risks the firm faces, it needs to be conducted in collaboration with front-office subject matter experts. The outcome of the risk assessment will be a clear understanding of the behaviors, instruments, desks or regions that the firm must prioritize for monitoring.
4) Understanding and prioritizing coverage
Once firms have assessed their risk and reviewed the effectiveness of their detection models, they then are able to map the coverage of their surveillance. Efforts can be focused on high-risk areas where detection is incomplete or ineffective, which often means enhancement of current detection models instead of developing new ones.
5) Openness toward regulators
Julia Hoggett, Director of Market Oversight at the Financial Conduct Authority (FCA), views the relationship between banks and regulators as a partnership: “Sometimes firms may have not built a surveillance system that works as well as it could or should, or sometimes they may not have factored a certain type of behavior into their monitoring… The FCA can play a role in providing feedback to firms to support the enhancement of their monitoring.”
Leverage technology for compliance
The requirements of MAR are a nearly impossible task for large-scale, international entities to meet without a software platform to ensure compliance. As the European Parliament states in their directive on MAR, “unless firms embrace technology as a base for managing the vast amounts of data and reporting for which they will be responsible, they face an insurmountable task.”
Blueprint OneWorld’s Insider Manager software offers a number of elegant and practical solutions to the problems of MAR compliance. It allows batch adding and editing of insider subscriptions, tracks details of close periods, projects and permanent sections with their associated insiders, and the efficient production of MAR reports for regulation authorities.
We hope to be your business’s all-access entry point to ensure your entity retains fair and compliant practices in every market within which it operates. Please call or email us to discuss these and others of our products.