A clear understanding of the business, frequent risk assessments, staff training, and a suitable surveillance system are key to compliance with Market Abuse Regulation (MAR) and its equivalences. So too, are governance, board level responsibility, and a strong compliance culture across the organisation.
These are just some of the findings from a recent webinar hosted by A-Team Group and sponsored by SIX, MAR – how to detect and analyse abusive market transactions. The webinar was moderated by A-Team Editor Sarah Underwood and joined by a panel of experts comprising Jamie Bell, Head of Secondary Market Oversight at the FCA; Katharine Harle, Partner at Dentons UKIME; Karyn Harty, Head of Litigation at Dentons UKIME; and Francisco Merlos, RegTech Product Manager at SIX.Starting the conversation, the speakers described some typical scenarios that can cause firms to be penalised for market abuse. Poor controls around surveillance, a lack of awareness of market risks in the business, surveillance infrastructure that is not aligned to the risks, and a shortfall in core data controls were highlighted, along with poorly calibrated surveillance solutions, and a lack of training.
Challenges of MAR compliance
With these problems in mind, an early poll of the webinar audience asked, ‘What are the challenges of compliance with MAR at your organisation’. The poll results showed a high number of false positive as the main challenge, ahead of the cost of software and market data for trade surveillance, finding all required contextual information to perform investigations, constantly changing regulatory requirements, and a lack of management understanding or buy-in.
Picking up on these results, the speakers added the reasonable suspicion test of market abuse, a challenge that calls on human judgement and needs someone who understands the information received from surveillance reporting to make the call. Governance can also be a challenge, over reporting, and making sure technology solutions are implemented and calibrated to work well.
Small companies can experience the problems of manual surveillance, perhaps using Excel, and less resources than their large colleagues. That said, large firms can be hindered by numerous complex systems, and the need for nuanced solutions in particular jurisdictions.
Moving on to issues of responsibility for MAR compliance, the consensus was that the board must take responsibility for compliance, and roles from brokers to trading firms and DMA providers must be accountable for managing risk.
Technology solutions
Turning to technology, a second audience poll showed 50% of respondents using a trade surveillance tool provided by a third-party vendor, 30% using an internally developed solution, 13% manual processes, and 7% ‘other solutions’. The vote for third-party vendor provision was endorsed by the panel, which noted the benefits of surveillance tools offering economies of scale, lower cost of utilisation, and the collaborative contribution of a community that provides feedback to improve performance.
Selecting the right solution for a specific firm is based on understanding the business, its clients, approaches to trading, and making a risk assessment. While there are likely to be numerous solutions at different price points, things to look for include intuitive ease of use, timelines of updates, ability to reduce false positives, and total cost including not only licence fees, but also market data, corporate actions, and support.
In terms of technologies, cloud-based centralised solutions are available, and artificial intelligence and machine learning options are emerging to detect market abuse and prioritise alerts, although these raise problems of explainability.
New to the field is generative pretrained transformer (GPT) chatbot technology, or large language models, that show potential in compliance but are not yet ready for implementation. Solution providers are, however, working with the technology on functions such as helping compliance officers through the investigation process by proposing next steps. So far, the most developed use cases are in training and learning, keys to successful surveillance.
Best practice approaches
A final audience poll considered the business and operational benefits of successful compliance with MAR. The results showed benefits on both fronts, with operations leading the way. Broadening this to benefits and penalties, panel members noted that regulators are interested in working with regulated entities to help them get compliance right, and warned of the multi-million dollar fines of getting it wrong.
Summing up the webinar discussion, best practice approaches to detecting and analysing abusive market transactions start with ongoing risk assessment of what the business is doing, and move on to review governance, policies and processes, make sure the board understands and takes responsibility for MAR compliance, and that the surveillance team has an investigative mindset. Solution selection and systems calibration that will reduce false positives are also key, as are quality assurance, testing and documentation. Last, but not least, staff training is critical to success.
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