When the Market Abuse Regulation (MAR) came into force in 2016 it was a particularly tough time for compliance officers in Europe’s buy-side. The Markets in Financial Instruments Directive II (MiFID II) loomed large on the horizon; taxing even the most lavishly resourced of compliance departments. MAR was almost something of an afterthought: a compliance box to be ticked in the quickest way possible so that minds could focus on MiFID II.
Three years later, new research carried out on RIMES’ behalf by Opimas, a research and consultancy company, provides new insight into buy-side firms’ initial investment decisions around MAR compliance and where this leaves them today.
As a reminder, with the passing of MAR buy-side firms saw their market surveillance obligations across market manipulation and insider trading ramp up significantly. Coupled with the increase in both venues and instruments covers by MAR, these obligations represented a considerable challenge to existing surveillance models. In practice, this meant that most buy-side firms had to rapidly source automated market surveillance solutions in order to ensure compliance.
Significantly, Opimas’ study shows that in the run up to MiFID II sales cycles for market surveillance tools were considerably shorter than they are now. Today, a 12-18-month sales cycle is common, with Proof of Concepts often taking six months or more. These findings suggest that whereas in the past firms hurried to put in place minimum viable products to ensure compliance, today they are looking for deeper functionality.
Indeed, some of the work done by the Financial Conduct Authority (FCA) following MAR supports this contention. In its Market Watch newsletter, the FCA expressed concern that many firms relied too much on ‘out of the box’ alert calibration when implementing their surveillance solutions – exactly what you would expect to see in a hurried approach to compliance.
The challenge facing many firms today is that their solutions do not offer the range of capabilities they now require. In the Opimas survey, firms reported a range of issues with their vendor-provided solutions including false positives, insufficient instrument coverage and data integration/quality issues. Moreover, many have found that their systems are not suited to reuse to meet existing and future regulatory demand.
Another added complexity stemming from MAR was the requirement for firms to monitor ‘attempted’ rather than ‘successful’ market abuse. This has spurred the development of systems that purport to use behavioural science as an overlay on more traditional metric-based tools.
It’s little wonder therefore that fully 30% of the firms Opimas spoke to are actively looking for or are interested in new market surveillance solutions. Furthermore, 100% of respondents said they were either maintaining or increasing their IT compliance spend, and that market manipulation, insider trading and conduct violations stand out as their biggest compliance concerns.
Opimas’ findings suggest that a second wave of market surveillance investment is underway in Europe as firms get some headspace away from the pressures of MiFID II and look to address some of the functional limitations of their surveillance systems.
Octavio Marenzi, Opimas’ co-Founder and CEO, commented: “In the run up to MAR and MiFID II, firms scrambled to buy surveillance solutions and check the box. Now that the dust has settled, many firms especially in Europe, are scrutinizing their surveillance approaches and preparing to make substantive improvements.”
In the UK, there’s likely an additional driver in the form of the FCA’s Senior Managers and Certification Regime (SMCR), which places fiduciary duty on all senior managers within an organization. By extending personal risk for non-compliance to a broad base of managers, SMCR is no doubt a key factor in UK firms’ reappraisal of their surveillance capabilities.
What seems increasingly clear is that the manually-intensive systems bought in the first wave of investment have been found wanting, and firms across Europe are now calling out for multi-asset solutions that can assure the quality of their data and provide flexible models and a scalable solution for market surveillance and other order, trade and transaction based regulations.
In this second wave of investment, firms are recognising that market surveillance is a data-hungry process and that partnering with data experts offers a clear advantage to ensuring full compliance with minimal disruption.
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