You would think a regulation tackling the headline-grabbing illicit trading activities of spoofing and market manipulation would grab the full attention of European regulators. Considering the scale of the Libor rigging scandal and the high profile arrest of Singh Sarao in 2010, the Market Abuse Regulation (MAR) was a crucial implementation for the financial markets and its external reputation among the general public.
On 3 July 2016 the regulation went live, but after a year, we’ve scarcely heard anything about the rules as they have been overshadowed by a greater beast – MiFID II.
Considered quite the headache for firms back in the summer of 2016, MAR replaced the Market Abuse Directive and expanded requirements in terms of assets, markets and products. It eliminated activities like spoofing or market manipulation through complete system surveillance and reporting.
Now more than a year since it was introduced, talk of MAR has been relatively muted as firms continue to prepare for the onslaught of MiFID II, which is set to turn the industry on its head. MiFID II has in many ways overshadowed the implementation of MAR. The European Commission delayed MiFID II by a year after coming to term with the fact most firms – and the authorities themselves – would not have sufficient systems in place to handle the requirements on the original deadline, 3 January 2017. Market participants assumed the delay would be put in place for MAR, but this was not the case.
“MiFID II covers front, middle and back-office functions whereas MAR is much more specific. Many market participants implemented MAR as part of their MiFID II projects which meant it wasn’t as prioritised as it perhaps should’ve been. It was also widely expected to be delayed alongside the initial delay to MiFID II,” says Dan Simpson, head of research at regulatory consultancy firm JWG.
“It meant that MAR from an implementation standpoint was only focused on in a serious way in the last few months before the deadline. In the current climate, it’s not unusual for regulations to be implemented relatively last minute and include short-term fixes to make quick winds, but MAR was dealt with much quicker than most other regulations,” he adds.
Last minute panic
Just prior to the delay, there was a flurry of market participants buying systems labelled as being ‘MAR compliant’ in order to tick that box for the regulator.
There is no doubt market surveillance is big business. PwC estimated in a study last year banks would increase spending on market surveillance technology over the next 18 months by an additional £5 million – £10 million.
Interestingly, the study also found tier one banks were largely unsatisfied with the technology, describing it as ‘not working as well as banks need it to’. More than 65% stated the number of false positives – or messages and events incorrectly flagged as high risk – generated by surveillance systems was too high. PwC said the study highlighted widespread dissatisfaction with error rates and the high cost of reviewing inaccurate alerts from automated monitoring of both electronic messages and trade patterns. In spite of this demand for market surveillance products continues to grow.
“Due to the scope and complexity of their market activity, market participants are increasingly looking at automated solutions. Technology plays a part in enabling firms to monitor for market abuse, but it is also about internal processes, culture and an understanding of how instruments trade,” says Adedamola Adetola, commercial director at market surveillance technology provider Ancoa.
“We haven’t seen a drop off in interest post-MAR, but we have noticed greater competition for resources for delivering projects at our clients due to other priorities like MiFID II and Brexit. In the future, we anticipate increased focus on the output of automated systems, particularly around the ability to accurately calibrate alerts.”
Dermot Harriss, senior vice president of regulatory solutions including market surveillance at OneMarketData, explains surveillance activity has picked up again in recent months. Although he says this has more to do with MiFID II than with MAR. He also highlights the effects of firms being aware that regulators cannot enforce MAR perhaps as diligently as they would like to.
“MiFID II’s best execution and MAR have a very similar philosophy,” adds Harris. “Savvy market participants are more than aware regulators are ill equipped to enforce the MAR rules at the moment. As a vendor, we often find banks implement surveillance systems due to internal policy rather than regulatory requirements.”
“There has certainly been more activity leading up to MiFID II. Interestingly enough there has been more activity on trade practice surveillance - which firms should have already implemented under MAR - and MiFID II best execution projects. But yes, there has been a resurgence in MAR surveillance coming up to the MiFID II deadline,” he adds.
Looking specifically at enforcement, it’s rare that regulators would seek to impose penalties on non-compliant firms from day one of any new regulatory implementation. It takes time for firms and the market to work out the rules, and it requires authorities to have sufficient and decipherable data to have a holistic view to find out which firms are compliant and which are not.
Spoofing - or the act of bidding with the intent to cancel before execution - has once again hit headlines over the course of this year. In January, Citigroup’s global markets business was slapped with a $25 million fine for spoofing US Treasury futures and failing to monitor the activity or have adequate systems in place to detect such illicit activities. Enforcement is a difficult and painful process as it can take up to several years for investigations into illicit trading activity to be carried out. In the case against Citigroup, the alleged activity took place between July 2011 and December 2012, yet the penalty was handed out more than five years later. Nevertheless cases like this one often see market participants sit up and pay attention, and MAR experts agree a high-profile case of non-compliance would bring MAR to the forefront of firms’ attention once again.
A report produced by global law firm Linklaters in June this year outlined whether firms should expect a knock on the door from authorities checking up on MAR implementation any time soon. In the case of identifying inside information, announcements and disclosures Linklaters said: “In our experience it has become increasingly common for the FCA to launch inquiries after significant announcements. Companies should be prepared for the FCA to ask questions if the correct procedures have not been followed, or if an announcement has not been badged as inside information but triggers a price movement.”
In some cases regulators are satisfied if a firm can show and take them through plans for compliance, demonstrating an understanding of how the rules will affect a business overall. Market participants are also aware regulatory texts are subject to change, even once implementation deadlines have been and gone. But MAR could see a new lease of life from authorities once 3 January 2018 has passed.
“MAR is definitely an area we can anticipate tweaks and maybe a thematic review from the FCA around market abuse and the way it’s addressed in the UK next year. It should kick off discussions around what worked and what didn’t,” says Simpson. As the financial services industry continues to be swept up by preparations for MiFID II, one thing is certain: MAR isn’t over yet.