Market Abuse Regulation

European Union FlagThe Market Abuse Regulation (MAR) came into effect in July 2016, with the aim of increasing integrity within financial markets.

The prohibitions of insider dealing and unlawful disclosure of inside information, and market manipulation, apply to:

  1. Financial instruments admitted to trading on a regulated market or for which a request for admission to trading on a regulated market has been made
  2. Financial instruments traded on a multilateral trading facility (MTF), admitted to trading on an MTF, or for which a request for admission to trading on an MTF has been made
  3. Financial instruments traded on an organised trading facility (OTF)
  4. Financial instruments not covered by point (a), (b) or (c), the price or value of which depends on or has an effect on the price or value of a financial instrument referred to in those points, including, but not limited to, credit default swaps and contracts for difference

‘Financial instruments’ are currently defined in MiFID I. From 3 January 2018 they will be defined in Annex 1 of MiFID II.

MAR also applies to emission allowances and emission allowance market participants (EAMPs), benchmarks, and spot commodities are in scope in certain situations.

The main areas of MAR are as follows;

  • Inside information and disclosure
  • Insider dealing and unlawful disclosure
  • Market manipulation
  • Market soundings
  • Buy-back programmes and stabilisation measures
  • Accepted market practices
  • Insider lists
  • Suspicious transaction and order reports
  • Managers transactions
  • Investment recommendations
  • Whistleblowing

In markets this complex, there have been many moves to adopt new compliance processes and procedures, along with heavy investment into technology solutions which seek to proactively identify suspect trades.

Many would agree that the implementation of MAR has brought trading compliance to the fore, although there remains much complexity around how to effectively monitor for suspect trading activity.

 

Some Challenges for Commodity Trading Firms

A selection of operational challenges for trading firms are highlighted below:

  • How to proactively identify ‘suspect’ trades, given that data may be spread across multiple transaction booking systems.
  • How to develop surveillance reports which are tuned sufficiently to raise genuine cases to investigate as opposed to hundreds of false positives.
  • How to handle ‘off-system’ trades and ensure these are included within the surveillance framework
  • How to handle ‘approximately booked’ trades – these typically exist in order to hold a representation of a deal in a system, but technical constraints mean that the record is often a simplified representation of the true deal that was struck.
  • How to fit surveillance reporting processes into an existing operational control framework.
  • How to ensure that aspects of the front office and back office operations are able to follow the practices laid out by the directive.

Timeline

The Markets Abuse Directive (MAD) went live in July 2016.

Summary

MAR provides a number of business challenges for firms who are actively trading financial products.

Given the links between EMIR, REMIT, MiFID2 and MAR – firms are strongly advised to consider regulatory change in its entirety – rather than piece-meal.

This will prove to provide greater efficiencies of scale, greater reuse of processes and technology and consistent repeatable controls across the business functions.

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