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Compliance: What the Buy-Side Can Learn From the Sell-Side

One of the consequences of the raft of new regulations coming into force over the next two years is that buy-side firms are going to take on more responsibility for monitoring and reporting orders, trades and transactions. This is a major compliance challenge and one that mirrors the journey sell-side companies went on more than ten years ago.

The market abuse regulation (2014-596-EU), commonly called MAR or MAD II, which comes into force on July 3rd and replaces the market abuse directive (2003-6-EC), is a case in point. Under the initial MAD I directive, sell-side firms were obligated to detect and report on suspected market abuse and insider dealings. This was a burden that the buy-side managed to avoid, as their brokers could carry out this reporting on their behalf. MAD II will put an end to this arrangement and demands that buy-side firms carry out their own monitoring to ensure compliance.

Similarly, when MiFID I passed into law, the buy-side was exempt from reporting significantly on transactions. Again, this task could be left to brokers or the exchanges. However, under MiFID II buy-side firms will be obliged to report significantly on transactions via an APA, though real time trade will still be reported by regulated venues. This will add to the growing data management burden buy-side firms face.

As buy-side companies prepare for MAD II and MiFID II they find themselves addressing similar challenges previously faced by the sell-side. The key lesson to take from the experience of the sell-side is that successful compliance will require the effective management of an exponentially greater volume of data.

With MAD II, for example, the buy-side will need to monitor orders and trade as well as maintain complex insider lists. Under MiFID II the same firms will see reporting fields increase from 25 to 63, covering a much broader range of instruments, as will need to deal with complex best execution reporting obligations.

The experience of the sell-side provides a clear lesson for buy-side firms: scaling up data management capabilities will be a challenge when meeting MAD II and MiFID II. The sheer quantity of data firms will need to collect, monitor and report on significantly increases regulatory risk.

In the light of this challenge, buy-side firms are going to have to take a new approach to data monitoring, one which is capable of working to the new regulatory requirements and the increased scale of responsibilities that this entails for compliance teams.

As the sell-side did some ten years ago, buy-side firms need to recognise that compliance monitoring is now a core part of their operational requirements and start thinking about how best to change their business to reflect this fact. In part, this will require taking a fresh look at transaction and order monitoring systems capable of handling the increasing scope of instruments. This is a huge change and one that buy-side firms must start planning for immediately.

These topics, and particularly the incoming EU Benchmark Regulation, will be discussed at RIMES’ regulatory seminar in London on June 9th. Please click here to view the agenda and to register.

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