It’s been three years since the Market Abuse Regulation (MAR) came into force, with the aim to protect investors and increase market integrity. However, while significant investment has been made by Financial Institutions, the focus hasn't been on communications surveillance. We look at what's been done since MAR and what's still on bank's to do list.
Below read the full article.
What's changed in the Markets since MAR went live?
The MAR regulation was certainly ambitious, extending previous market abuse rules to cover any conduct or action that can have an effect on a financial instrument, whether it takes place on a trading venue or not.
Financial institutions haven’t taken this lightly.
In fact, figures show that banks have spent $737m developing and enhancing their surveillance capability over the last two years. The energy trading sector has also invested in surveillance - you can read here how Fonetic helped one firm meet their MAR requirements.
However, this investment has done little to stem the number of market abuse-related fines we’ve seen in recent months. One need only read into the fines to see where the issue lies. Almost every description boils down to a deficiency in one key area – communications surveillance.
Where does communication surveillance fit in under MAR?
While significant investment has gone into detecting market abuse in financial institutions, this investment has primarily focused on trade, rather than communications surveillance.
Given that 19 of the 26 identified behaviours identified under MAR require the corresponding communications to an order to identify any suspicious activity, this approach clearly doesn’t cut the mustard. Disclosure rules around inside information, market soundings and the ability to catch Material Nonpublic information all require communications monitoring to ensure market rules are being adhered too. As a result, most financial institutions under the watchful eyes of the regulator are likely to be woefully unequipped.
Given the number of recent fines we've seen for institutions in violation of MAR, it's clear that any kind of regulatory grace period for institutions to put systems in place is long gone.
In fact, in some cases regulators have actually started manually looking through communications in order to sift out any suspicious behaviour. As the regulators start to close in, institutions need to adapt in order to keep pace. It's not only something firms need to look at to comply with MAR, but MiFID II regulated firms also have responsibilities involving recording and monitoring their employees communications.
This doesn’t mean there is a need to panic.
Where previously voice surveillance was seen as a ‘problem child’, which was too complex for the technology to get right, financial institutions are starting to realise that there is surveillance software available which can monitor voice channels or other communications and link them, automatically, to their related trades, all together in one system.
New technology can not only identify when misconduct has happened, but has also developed to track malicious intent in trader communications, potentially stopping the crime before it has even been committed, or at least had time to cause significant reputations damage to the firm.
Banks who can get this combination of trade and communications surveillance right will be able to identify any malicious behaviour well ahead of time, so they can rest easy when the regulator comes to call.