Of all the regulations affecting the buy-side, the Market Abuse Regulation (MAR) is arguably the most far-reaching. The Regulation, which came into force on July 3, 2016 applies in all EU Member States and replaces previous market abuse directives. Under the terms of MAR, buy-side firms must put safeguards in place to identify and reduce the risk of market manipulation and insider trading.
The impact of MAR should not be underestimated. For most buy-side firms, MAR demands a completely new approach to compliance and governance that places market surveillance front and center. Historically, buy-side firms have been able to outsource market surveillance to their brokers, so many may find themselves without the in-house skills to put in place the systems and processes needed for compliance. If handled incorrectly, achieving compliance with MAR will engender considerable cost and will disrupt the day-to-day activities of buy-side firms.
With MAR now passed into law, all that remains is for ESMA to clarify areas of uncertainty, and provide implementation guidance to firms. In January, ESMA issued an updated Q&A on MAR, which provided clarification around managers’ transactions and investment strategy recommendations. At the same time, ESMA issued new Guidelines, providing information relating to the definition of inside information on commodity derivatives. Over the remainder of 2017, ESMA is prioritizing MAR in its supervisory convergence work and intends to finalize its Guidance around the underlying IT infrastructure.
2017 is therefore a critical year for buy-side firms as they look to achieve compliance with the Regulation. As they do so, they will be assisted by a new RegTech industry that is springing up to meet their increasingly complex regulatory needs.
RegTech solutions are different from traditional IT systems in that they are agile, ‘light-touch’ and low-cost by design. This means that firms do not have to invest in costly and highly disruptive capital infrastructure projects to achieve compliance. Instead, they can leverage the scale and usability of cloud-based ‘as-a-service’ delivery models. This lowers the total cost of ownership and means firms can update their systems and processes without interrupting their operations. The benefits of this approach are such that its estimated the RegTech industry will be worth $118.7 billion by 2020.
RIMES new RegFocus product fits into the RegTech category. Specifically designed to help buy-side firms comply with MAR, RegFocus delivers compliance policies and a robust framework that ensures customers can identify and control market abuse early and confidently. RegFocus is a managed service, so firms using it do not have to upgrade their internal technology systems, they can simply access all the tools needed to identify, monitor, map and report on a broad range of behaviors through an online portal. As a result, firms using the service are able to get on with their core activities, free from the disruption and cost associated with in-house alternatives.
MAR is bringing about a sea-change in compliance and governance processes at buy-side firms. However, the market is reacting to events and it is now clear that if the right approach is adopted, complying with the stipulations of MAR need not be onerous.