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Nigel Farmer

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Nigel Farmer - Software AG

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On Your MAR, Get Set, Go!

24 May 2016  |  4269 views  |  1

Under Starter’s Orders: Market Abuse Regulation

We are almost under starter’s orders for compliance with the new market abuse regulation (MAR), which comes into force in Europe on July 3rd. Enhancements to MAR across Europe strengthen rules against insider dealing and market manipulation, and add provisions to prevent and detect them.

Most firms should be well on their way to having systems ready, but it is worth reminding ourselves of some of the major changes in the regulation and the impact of those changes.

 

More venues and instruments need to be monitored.

This means that additional data feeds will have to be integrated into surveillance platforms. Getting timely and accurate data is often a challenge when it comes to surveillance. Compliance teams  usually have to piggyback off of front office systems and this can result in additional layers of “spaghetti” and inconsistent methods  of integration, which are difficult to monitor and costly to maintain.

 

The more incoming and varied the data feeds, the bigger the problems for compliance IT.

Enterprise grade integration and messaging platforms can help to overcome some of these problems, but adoption across silos will be essential, but unlikely unless it is part of some larger transformation programme. Ideally, banks will consider all the new regulation that is coming as, on the whole, as it becomes easier see the overall value of change and justify the cost, than on project by project basis.

 

The requirements to monitor across assets for manipulation means that silo based monitoring systems are no longer viable

It may be possible to adapt these systems, but not without cost and complications. Inefficiencies and compromises may also be incurred, such as duplication of the same algorithms for different asset classes and an increase in false positives. A more efficient and future-proof approach would be to utilise an asset agnostic surveillance system that can be easily be adapted as regulatory requirements change.

 

The need to report suspicious orders, as well as trades, increases the volumes of data that will need to be processed and stored. 

The volume of data storage required for orders should not be underestimated. As a result, in-memory database technologies will likely see wider adoption within compliance departments. Modifications and/or additional algorithms will also be required to cater for changes such as the extension of insider trading to include modification and cancellation of orders. Again flexibility is key, as the number of false positives could swamp a compliance team if there is no means of customizing logic and threshold parameters.

 

The definition of insider trading is also being extended to cover amendments and cancellation of orders.

The detail of what must be kept in insider lists is also changing. It is important to be able to effectively maintain insider lists and for this information to be available to the surveillance system that it is trying to detect cases of insider trading.

 

MAR and other regulatory changes will have an impact on processes and procedures.

It is becoming increasingly important that these are documented, signed off and that manual controls are in place where automation is not possible. Business process automation (BPA) tools are seeing increasing use within compliance teams and it’s easy to see why.

With increased regulation, and the burden it places on compliance teams, growing there are bound to be some false starts on July 3rd. But regulators will be much more lenient with banks that can demonstrate planned processes, procedures and controls and timelines for implementation, than those that simply hold their hands up. Get set, go. 

 

TagsRisk & regulation

Comments: (1)

Tayloe Draughon
Tayloe Draughon - CloudQuant - Chicago | 26 May, 2016, 15:38

Very insightful post Nigel.

There are many key points that you discuss in your posting. Compliance IT spending has been increasing.

On the positive side, regulations requiring the storing of electronic trading log files have been around for some time. The collection of these log files should be second nature to trading firms and banks around the world.

On the negative side, collecting log files and ensuring that they have the correct data, and all transactions is deemed to be boring and low priority to many IT teams. I am aware of multiple banks that struggle with the collection. To highlight the problem all one has to do is ask “Are you sure you have every order in your log file from yesterday? If so, how do you know?” Even if they have these files, the next issue is determining what levels of oversight of the trading activity is needed. Questions abound.

Finding your focus as a compliance officer is a massive challenge. Traditional trade surveillance systems provide alarms, usually a lot of them. Modern surveillance systems need to help a compliance officer to quickly focus on market manipulation and to assist that officer in searching for similar occurrences in the past history of that trader.  

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job title Industry Director, Capital Markets
location London
member since 2016
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Nigel Farmer is the head of Capital Markets solutions at Software AG, responsible for the strategy,product management and marketing of solutions in areas such as Market Surveillance, Pre-Trade Risk, F...

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