In today’s regulation “wonderland,” EU capital markets participants are beginning to go MAD. The current timetable for the market abuse regulation (MAR) proposed by the EU Commission will likely take effect in 2015, but preparation for this regulation should
commence as soon as possible. The proposed MAR and MAD II is extensive compared to the current market abuse directive (MAD, Directive 2003/6/EU) and although 2015 probably feels like a distant date in the future for most, the magnitude of the changes warrants
urgent and close attention and consideration. There are five key items that firms should focus on today in order to be ready for MAD II and MAR.
You must consider from where and how will you bring in all the data you need to effectively ensure traders are not involved in the planning and/or execution of potential manipulation of all the asset classes and markets traded by your firm. This will not be
limited to orders with full details and order history, and resulting executions, but also include dialogue with clients, brokers, and fellow traders, be that over email, texting or in chat rooms. You will also need the full depth and breadth of available market
data for all asset classes and markets, including settlement and market prices. This should be a particularly interesting challenge in the OTC space.
Your processes and organization need to be flexible and agile. You need to be able to think outside the box and be prepared to make uncomfortable and potentially far-reaching decisions about what regulations are relevant to your business, and what potential
impact they could have on your current and future business models.
Implemented tools will have to be very flexible and configurable to allow for additional regulatory changes and updated guidelines. Very important is the ability to actively guide and calibrate your tools to suppress false positives as far as possible while
maintaining a reasonably low risk on missing any potential abuse cases. This challenge is greatly increased when considering the cross-asset class and cross-market aspects. To fully cover all aspects of executions, your surveillance processes also need to
include trader, sales rep and client discussions in the mix of analyzed data.
3. Breadth of Functionality
Needless to say, your tools need to be able to cater to and analyze complex multi-tiered OTC products and be able to analyze low-liquidity instruments where perhaps only trade information is currently available, while at the same time being capable of analyzing
your prop trading co-located algo activity. These different aspects of capital markets activity put very different types of requirements and demands on tools, and they need to be broad and flexible enough to cater for these fundamentally different requirement
4. Oversight, Overview and Reporting
In order to gain any kind of overview and oversight to all different streams of trading and activity across your organization’s different subsidiaries and branches, or even a few trading desks, some kind of dashboard and configurable management reporting is
paramount. How else would a compliance officer prioritize his work and be able to provide pertinent and summarized executive reporting to risk and management boards? With limited resources and budgets, it will only be increasingly important to ensure efforts
are focused where they reduce risks the most, and only with accurate and well-defined reporting will this be possible. As the reach and breadth of regulations increase, coupled with the evolution of your business, you must be able to adjust your compliance
focus and routines to ensure you stay focused and on top of firm and client activity where it matters.
A key aspect of a surveillance function is the ability to spot trends over time. Manipulation of a settlement price or an underlying security in order to gain an advantage on an OTC position may reveal itself only after a few offenses, as it’s quite easy to
write off a single potential instance as a false positive in the jungle of data and considered cases on the table of a compliance officer.
While you’re at it, take a serious look at your surveillance solutions, data gathering methods and staff skills to ensure budgets, plans and resource development are lined up with the ambitious plans of regulatory organizations as well as your firm’s business
The breadth and depth of changes to come will hit home sooner rather than later, and the organization that stands well prepared will see business advantages vis-à-vis competition. With the right mindset, this is an opportunity to get ahead and should not