Catching up on MAR compliance

Although the deadline for Market Abuse Regulation (MAR) compliance has already passed, many firms are still unsure of how to move forward. MAR is the latest in a series of important regulatory changes intended to strengthen investor and consumer protection, prevent market abuse, reduce systemic risk and improve the transparency of financial markets. In this post we review what compliance officers need to know about MAR and discuss what it means for the overall regulatory landscape.

An important takeaway on MAR is that regulators have shown they will actively pursue cases against firms that they believe are unprepared to meet its directives. In addition, firms that are purposefully laggard or are slow to produce reports of potential market abuse are more likely to be subject to audits and regulatory inquiries. In other words, firms that become MAR compliant now will avoid grief in the future.

Fortunately, many of the extensive reporting requirements of MAR, which involve tracking and storing all communications (phone calls, emails, etc.) using WORM storage, are already included as part of both MiFID II and Dodd-Frank record-keeping rules. So most firms likely already have a head start when it comes to complying with MAR, especially considering the many other overlapping regulatory requirements with MiFID II and Dodd-Frank. The additional MAR-specific requirements firms need to consider include:

  • The ability to conduct effective and ongoing monitoring of orders received, transmitted and executed for the purpose of identifying suspicious behavior
  • Ensuring that upon request, they are able to provide regulators with analysis on suspicious orders and transactions which have been examined and reasons as to whether or not a Suspicious Transactions and Orders Report (STOR) was submitted
  • The ability to submit a STOR to regulators along with supporting documents, communications, telephone conversations, and order and transaction details

One of the more challenging details of MAR requirements, especially for smaller buy-side firms that may not have faced this level of regulation in the past, is the need to monitor orders before they become trades, and go back and prove that monitoring took place. This is an extension of the overall record-keeping requirements, with an emphasis on having firms prove that they can prevent market abuse from happening in the first place, rather than identifying and correcting the source of market abuse after the fact.

Another potentially tricky requirement is voice recording, specifically, the ability to securely record and store all phone conversations, and report the contents of those conversations back to regulators. This will require WORM storage to record data so it cannot be manipulated and so a firm can validate that no manipulation has occurred.

Despite a potentially steep upfront cost, MAR and other related regulations, once properly implemented, will reduce overhead on compliance and support functions for buy-side and sell-side firms. Finding data has long been a major challenge for compliance teams. So once information is online and easily accessible, it’ll become much more cost- and time-efficient for firms to respond to regulator requests because they can skip directly to analyzing the data instead of having to first find it.

Firms should not underestimate the importance of MAR requirements and act quickly to get up to speed. Once compliant, these firms will be in a better position to transition to finalizing preparations for MiFID II and MIFIR.

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