In less than five months the European financial services industry will be confronted with more stringent rules regarding market abuse with the implementation of the Market Abuse Regulation (MAR) on 3 July. Firms engaged in OTC derivative trading and algorithmic trading will for the first time need to prove they have automated surveillance capabilities in place. Meanwhile, other market operators and investment firms will most likely have to re-architect their internal systems in order to comply with the detailed information capturing Suspicious Transaction and Order Reports (STOR) requirements. The European Securities and Markets Authority (ESMA) has deemed that, for the large majority of cases, an automated surveillance system is the only method capable of analysing every transaction and order – and there are only five months left in which to implement appropriate systems.
From recent conversations with our main brokerage clients, a recurring question is if Ancoa itself is ready for MAR, mainly in relation to the new STORs requirement with its potential to capture a wider range of possible abuse cases. A change from the existing STR (Suspicious Transaction Reports) regime, the new STORs requirement mandates that suspicious ‘orders’ are to be reported to regulators, as well as the ‘transactions’ that are required today. This means that suspicious orders would need to be reported even if they do not proceed to execution. In capability terms, surveillance systems will soon have to have the ability to show intent, just as much as outcome. Regulators will shortly be reviewing the cancellation or modification of orders, meaning the system’s alerts for spoofing and layering have had to be updated so that trade manipulation can be captured, regardless of if the order has been executed. Real-time surveillance comes into its own in this scenario, given that firms could then retract a suspicious order that had not been executed.
King of context
Another noted change amongst our broker clients is the demand for a more contextual approach to surveillance. This could be a consequence of the FCA’s findings last year that asset management firms needed to considerably improve their effectiveness in post-trade surveillance.
It is only with access to high-quality market data that a compliance officer will be able to make a judgement of whether to go ahead and submit a STOR. In order to properly ascertain if an act of spoofing or layering has taken place, access to high quality market data and machine-readable news is needed so that firms can attain a complete view of all the alerts and risk scenarios. Robust replay capabilities and strong visualisation are crucial in accurately detecting potential cases of market abuse.
Painting, marking, washing…
Ancoa has been hard at work in updating its systems in preparation for the implementation of MAR. We have been focussing on insider dealing-related alerts, involving insider trading and front running, and market abuse-related alerts, including marking the close, wash trading, painting the tape and creation of the floor to mention but a few. The spoofing alert, for example, was adjusted to reflect the fact that if orders were made and subsequently cancelled before an actual trade was processed, an alert would be nonetheless activated regardless of a successful outcome in the form of a price improvement on a trade. A compliance officer would likewise be given alerts for instances of pinging, momentum ignitions and quote stuffing. With an automated surveillance system, brokers can prove to regulators that they are in prime position to spot potential market abuse activity.
On your MARks…
Regardless of the expected delays to MiFID II, none of the changes to the European Market Abuse regulatory regime are expected to be postponed. This means that the establishment of appropriate systems and procedures by firms in order to detect potential market abuse will likely become a high priority for the national regulators. If firms can demonstrate to regulators that they have proactively prevented layering, spoofing or marking the close, regulators should be satisfied that the firm is handling events in an appropriate manner. In answer to our main brokerage clients, Ancoa is indeed more than ready for MAR. The question is, are you?
This blog was written for The Trade by Stefan Hedrickx, Founder and Executive Director, Ancoa.