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.
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
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.
Bloomberg published an interesting article on JP Morgan’s new holistic surveillance capabilities. They would seem to be now capable of looking at their employee activities from 360 degrees and even predicting bad behaviour. I am a little sceptical of the use of the term ‘forecasting’, but certainly this kind of holistic surveillance is exactly the kind of compliance risk management that is at the forefront of practice, and sadly lacking in today’s packaged solutions. See the Bloomberg article here, and also my earlier post, Surveillance Whack-a-Mole, here.
I attended the FIA Europe Power Trading Forum on the 26th March. An excellent event where several trends were noteworthy.
Firstly several exchanges had been invited to give updates on their product roadmaps for the coming months and years including APX, CME, EEX, Nasdaq & Nordpool Spot. The aggressive level of planned competition was notable with pretty much everyone in the process of launching new cleared products in gas and power in Europe and/or the US. CME are entering the European market as a greenfield provider, and EEX, having launched an NBP Natural Gas contract on the same day, declared that cleared UK Power was ready in the wings, while Nasdaq is launching US Energy products against Brent, WTI, & HH.
There was also a general feeling that a general move to cleared exchange traded and bilaterally margined products would lead to a collateral crunch, possibly within two years. The lack of easily available eligible collateral is also an opportunity that the banks are looking forward to exploiting with collateral transformation services. Despite the continued depressed oil price, some commodity firms would appear to remain a good risk for banks, with Trafigura announcing a new revolving credit facility of $5.3bn the same week. Inventory, cargoes, and receivables all form excellent sources of working capital for conversion to eligible collateral using financing, repos and so forth.
The physical trading participants themselves were of course also focussed on REMIT reporting issues. There is a risk of complacency here. Just because budgets are in place and an EMIR-like reporting programme now feels familiar, it does not mean there aren’t a lot of critical risks/uncertainties to address and decisions to make promptly if you want to hit the deadline!
ESMA today published its “technical advice on possible delegated acts concerning the Market Abuse Regulation’ this morning. This constitutes advice to the European Commission on further detailed legislation to support MAR. While it is early days in the overall process, a quick glance at the content contains many terms familiar to all who have been grappling with EMIR and so forth for the last few years, e.g. benchmarks, thresholds, inside and physical information disclosure, emissions, orders to trade, reporting. Familiar terms, but no doubt new implications for the Compliance workplan.
More bed time reading. See here.
The new compromise text (21 January 2015) from the EU Presidency on the draft Regulation on indices used as benchmarks makes for interesting reading on several counts. It outlines a comprehensive regime of controls and obligations for regulators, benchmark administrators, and for contributors.
Amongst other things it proposes mandatory surveillance and reporting of suspicious contributions by both contributors and administrators and additionally for contributors of the relationship between contributions and reversed trades for contributors. Another review of processes, controls and segregations to schedule and define scope vs your REMIT programme!
See the latest draft here.
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’.
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.
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.
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’.