The FCA has published a concise ‘one minute’ guide on the Market Abuse Regulation (MAR).  It gives an overview of the purpose, scope, requirements and timing of implementation.

See here.

I attended Nasdaq Smarts Trade Surveillance symposium last week. IT was a useful and well-constructed seminar, with valuable insights from Kinetic Partners, KPMG, Tabb Group and of course the Smarts team.

Upon reflection the key takeaways were

1. There is still no established “best practice” in in the world of surveillance
2. Many financial institutions (buy and sell side) are only ahead of the game in the sense that they have some surveillance capabilities already in place, but this is often limited to trade execution feeds.   They are challenged (budget, methodology, technology) to access and consolidate the pre-trade audit trail of orders, phone calls and chat expected by ESMA, let alone KYC type information and social media.
3. There is some excitement stirred by innovative FinTech vendors entering the space with new capabilities for dealing with data integration, volumes, and unstructured data processing, but … refer to 1 above.
4. The astronomic levels of fines and settlements, and the publication of the FCA case studies strongly underpin the business case for action on this front, driven by the almost ‘prove yourself innocent’ regulatory stance.

With the REMIT requirement for surveillance in place, and MiFID2/MAR deadlines moving rapidly towards us, there is a lot to be lost by doing nothing, and notwithstanding lack of clarity on the end-game, much that can be done usefully without regret.

Leader Change Thyself

Leo Tolstoy, the Russian novelist, famously wrote, “Everyone thinks of changing the world, but no one thinks of changing himself.”  This is a good maxim to remember when considering how to respond to the next wave of compliance challenges.  The alternative may be to find yourself playing what Amazon sells as a ‘fast and fun pre-school game’.

Why do Anything?

If public scandals are insufficient call to action,  European Union regulatory edicts like the Market Abuse Regulation (MAR) and the Regulation on Energy Market Integrity and Transparency (REMIT) are bringing surveillance still closer to the fore for capital markets and energy traders alike.  The industry is investing billions in reporting transactions to regulators under EMIR and, despite the undoubted data quality issues, the experience of MiFID suggests that it won’t be all too long before the regulators start levying small fines for lack of operational reporting compliance and, shortly after that, larger fines for malfeasance in insider trading and market abuse, based on the new transparency.  Fines are already staggering on both sides of the Atlantic so there is plenty of justification for action.

Technologists, lawyers and consultants are circling the scene anticipating rich pickings in programme management, data integration, and exciting applications for new technologies like Big Data, natural language search and analytics.

It does not stop at fines however, indeed Mark Carney, Governor of the Bank of England said “The repeated nature of these fines demonstrates that financial penalties alone are not sufficient to address the issues raised. Fundamental change is needed to institutional culture, to compensation arrangements and to markets.” See here.  For front office executives and compliance officers this new focus of regulators on leadership, culture and accountability raises the personal stakes involved.  Leaders are expected to know what their organisation is doing, how it does business, and to ensure dealings are fair and transparent as well as, of course, legal.

There is a Problem

In my discussions with various compliance officers and technology managers the picture is however confused and there is a lack of clear direction. There are several barriers to decisive action.

On one hand is a degree of procrastination.  I hear that ‘It is not explicitly clear in REMIT that participants need an internal capability’, ‘I think the regulators have bigger fish to fry so I will wait’, ‘The MAR Level 2 text is not final, and the inclusion of the word “automated” is in review’. This is not altogether unreasonable, such reasoning served participants fairly well for EMIR Transaction Reporting, which turned out to be much delayed and finally easier than many feared, although many are also now experiencing the pain of living with last-minute, quick-fix solutions and industry utilities whose solutions are less robust than had been hoped for, leaving staff taxed with manual and uncertain processes.

On the other hand there is a real question of prioritisation.  Financial services firms are certainly under attack from many sides; for benchmark abuse in the world of interest rates and FX, but also for miss-selling of products, be it interest rate hedging products, predatory consumer lending, money laundering and issues with algorithmic trading strategies and tactics.  At what point does your compliance and control strategy begin to resemble a game of whack-a-mole?

The picture is hardly clearer for oil and gas firms, mining, and energy utilities.  Country and person-specific sanctions, embargoes,  dealings with foreign government officials, extra territorial bribery and corrupt practices legislation all reach into the same budget pockets as MAR and REMIT, and are each deserving, involving potential personal sanctions for executives as well as crippling potential financial sanctions.

When and Where Should you Start?

It was refreshing this week to meet with a firm whose approach was holistic and based on first principles of good business practice in addition to simply box-ticking against what I call the ‘N Commandments’ (‘thou shalt not…’). This would seem likely to serve well in the face of the inevitable uncertainty and changing priorities, and offer some flexibility by way of varying budget over a multi-year investment.

Senior executives sponsorship is not only a critical hurdle to sanctioning budget to start, it is crucial to the success of the wider programme for the reasons Mark Carney outlined.  How many organisations can muster the budget to start the journey soon is a question of how great are the challenges of institutional culture.  If management is ready, it is safe to start.  If not, you could find yourself playing that ‘fast and fun pre-school game’.