Latest market abuse rules prompt quick-fix compliance

Spies may be well-versed in the art of evading detection, but even they may struggle to shun the advances of City headhunters this summer.


Banks are looking for quick-fix solutions before the new rules come into force

Banks are on the prowl for surveillance experts, with UBS, Deutsche Bank, State Street, Societe Generale, HSBC and Lloyds Banking Group all among those seeking to bolster their manual surveillance capabilities with a mix of permanent and temporary roles.

As a result, salaries for these roles are being pushed up, according to a headhunter familiar with the hires, with a temporary role at Lloyds offering up to £800 a day – a marked increase from the normal day rate of £500 to £600. Lloyds did not respond to requests for comment.

Throwing manpower at the problem is just one example of a series of “stop-gap solutions” being seized upon by banks as they rush to prepare for the imminent introduction of tougher market abuse rules.

The revised Market Abuse Directive is due to come into effect in the UK and Europe on July 3 – something that was not going to be affected by the UK’s decision on its EU membership, according to a regulatory lawyer in the City.

It has a much wider scope than its predecessor, with asset managers coming under its influence and a much wider range of transactions needing to be recorded to detect manipulative trading. What’s more, as the new rules are an EU regulation, rather than a directive, they will not be open to interpretation by national authorities, and firms that fail to comply could face heavy fines.

Stop-gap solutions

Even though the rules take effect shortly, the industry is still waiting for clarity from EU regulators on significant aspects. The European Securities and Markets Authority is expected to issue Q&A guidance only after the July 3 start date, people familiar with the matter said.

An Esma spokesman said it was in contact with its respective stakeholders on “practical issues” relating to MAR’s implementation and that it was “natural” that not all Q&A guidance could be issued prior to the rules’ introduction.

Matthew Clay, a senior manager in the risk and compliance unit of consultancy Baringa Partners, said: “Broadly speaking, everyone is struggling [to get ready for the new rules in time].”

As a result, Clay said the industry’s attentions were on implementing “tactical or stop-gap solutions” as an interim measure until full compliance with the new Market Abuse Regulation was feasible.

Quick fixes include bolstering internal surveillance teams – often with temporary staff – repurposing data generated for internal risk management to also track for possible market manipulation and implementing small-scale technical solutions that can help comply with aspects – but not all – of the directive.

Will Dennis, the head of compliance at industry body the Association for Financial Markets in Europe, said: “Everybody is working very hard but it’s not something that is going to be perfect on July 3.”

Any new hires that are brought in will be kept busy. Much of their work will consist of trawling through volumes of data for signs of suspicious activity. Many institutions plan to repurpose risk management reports to help them track for instances of market manipulation, but such plans are dependent, Clay said, on having the staff available to “churn through the daily reports”.

Clay said some European-headquartered banks in the City were looking to re-use data sets known as cancel/amend reports – which are typically used to look for fat-finger errors and operational risks in firms’ trading data – to monitor for trends that might indicate market abuse by their traders or potential collusion between a trader and their client.

In the near term at least, the burden for trawling through this data will fall on surveillance teams.

Clay said: “Everyone is conscious that it is not the ideal or sustainable solution. It’s happening [because] there is no other immediate solution, but firms are working very hard at the same time to assess what technical solutions are out there.”

He added that European firms were also repurposing compliance and risk management staff from other roles to take on more of a surveillance remit, to enable them to use “people to plug gaps within technical infrastructure”.

Tom Boulderstone, a divisional manager for compliance and financial crime at recruiter Barclay Simpson, said recruitment into surveillance roles was “still in its infancy”, and that banks were only just “starting to act”.

Rukshan Permal, a director in financial services at consultancy PwC, said firms would have larger teams to do more of the manual monitoring in the short term, but he expected “smaller review teams to follow” once institutions established in-house or externally provided technology so that they could rely on more automated solutions where possible.

A PwC study published in February said £156 million was set to be spent on surveillance technology in the next 18 months by the 20 largest banks in Europe, the Middle East and Africa.

Smarts move

Michael O’Brien, head of product management, risk and surveillance solutions at US stock exchange Nasdaq, said banks across Europe had been in touch “in the last few weeks” to discuss Nasdaq’s trading activity surveillance technology Smarts, which monitors trade data for signs of market abuse. Smarts counts around 60 regulators and exchanges as customers as well as a similar number of investment banks, broker-dealers and buyside firms.

He said: “We’ve certainly seen a strong surge in interest from European banks contacting us saying: ‘What can you do for us around MAR, what’s the coverage and how quickly can you get us set up?’ Our teams are working overtime at the moment on multiple deployment projects.”

Sourcing reliable e-communications and voice surveillance systems remains the ‘Holy Grail’ for many institutions. In February 2016, in response to client demand for holistic communications monitoring systems, Nasdaq announced a strategic alliance with US communications surveillance firm Digital Reasoning, which analyses information semantically for signs of misconduct.

UK-headquartered Behavox, US-based RedOwl Analytics and London-headquartered Ancoa are other providers offering similar services.

But various market executives said much of this technology was still seen as being in its infancy.

BNP Paribas’ Nunn said: “Are these technologies in a mature format? No, they’re not. Are they promising? Yes, they are.”

Ronald Gould, chairman at governance, risk management and compliance software provider Compliance Science, said he expected institutions would focus on implementing small software solutions to help them automate compliance bit by bit, with specific elements of the regulation, instead of looking for technical solutions that could meet all their obligations in one go.

He said it was likely firms would then “take a step back” once the rules came into effect to assess how the separate systems employed could be “consolidated and ultimately reduced to a more sensible and sustainable number”.

PwC’s Permal said: “Firms are working really really hard to get to the deadline… But I do expect that there is going to be a period of refining things [once the rules come into effect].”

• Will the regulators be lenient?

One of the biggest challenges for those trying to comply with the Market Abuse Regulation is the requirement for every single quote produced by banks and trading firms to be systematically recorded and monitored for signs of suspicious behaviour. Firms are currently required to track transactions across a much smaller range of instruments and trading venues.

The regime is requiring firms to invest large sums into new surveillance tools to systematically record and monitor voice and electronic communications. But Antony Whitehouse, the UK head of compliance at BNP Paribas, told Financial News in May that the technology to track all forms of orders was as-yet “non-existent or in its infancy”. He said: “That’s not going to change by July 3.”

The FCA indicated in April that it might take a lenient approach where firms “may not be in a position to deploy fully effective surveillance across all types of quotes as required by MAR”.

In response to industry concerns about the requirement for firms to monitor all so-called investment recommendations, the FCA held a roundtable in London on this aspect of the rules in late May. Industry trade bodies including Association for Financial Markets in Europe, the British Banking Authority, the International Capital Market Association, the Investment Association and the International Swaps and Derivatives Association were invited to attend.

The meeting helped to provide further clarity on regulatory expectations around investment recommendations, where industry participants had felt it was lacking, according to a person familiar with the discussions. In particular, it confirmed the FCA’s view that it was possible for communications to be neither investment advice nor an investment recommendation, thereby alleviating industry fears that all forms of every communication between its trading and sales staff and their clients would need to be monitored and, ultimately, reported on.

But concerns remain. While the FCA’s guidance on the new regime has made the industry “happier”, according to some insiders, the rules are ultimately enforced by the European Securities and Markets Authority, which has so far been less forthcoming on its expectations.

Karen Anderson, a partner in financial services regulation at Herbert Smith Freehills, said: “The FCA have given a strong signal that they will not penalise firms that are demonstrably working towards MAR compliance. But I’m not sure how much that helps because if Esma comes out with guidance to the contrary, then they will have to act on it.”

She said: “We’re still missing lots of bits. It would be helpful to get more guidance.”

An FCA spokesman said firms “should have been developing plans to comply with the new regime for some time”. Nonetheless, the spokesman said that the FCA recognised “the scale of the challenge” and, as such, supported firms who actively communicated as “the details of MAR have been finalised”.

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