An excerpt from the annual Financial Crime & Operational Security 2016 report

Moderator: Jason Merritt, Director, Subject Matter Expert (SME), NICE Actimize Financial Markets Compliance

Panellists:

• Jan Bjorkman, Group AML Officer, SEB
  
• Chris Allison, Head of Wholesale Compliance, Investec

Jason Merritt: The impact of MAR is predicted to be much greater than that of the existing rules. What are the main challenges banks faces when it comes to implementation?

Chris Allison: There are a few key issues that we have to get around but the biggest one from a time spent and complexity perspective is related to the technology challenge around investment recommendations.

Under MAR the definition of investor recommendations didn’t have the carve out for non-research products which it had previously.

It is hard to capture all of the communications sent from a sales desk for example and by its very nature comments from the sales desk are short term in nature and prone to frequent changes where you can be a buyer in the morning and a seller in the afternoon based on market moves and other factors.

Capturing those recommendations and all disclosures required in relation to those recommendations is a challenge that I understand, the industry generally has struggled with.

To meet this challenge we have made a number of updates to existing disclosure systems as well as developing a specific in-house solution to capture and log investment recommendations disseminated from the Sales desk.

Jan Bjorkman: We have also had an implementation project that we have developed as an in house solution to this issue.

The challenge is to link all of the core group systems to the market surveillance system that we have built. We have also provided training to all staff in this area.

There was also a challenge in understanding the requirements and to get guidance from the Swedish FSA in this area.

Chris: One of the broader main challenges is around interpretation as there has been very little guidance put out from the European authorities or the FCA so we have been working off of a set of rules which in some cases can be clear but in other cases aren’t. It appears, in the first few months of MAR, that banks have come up with some wildly different solutions to some of these issues.

Also, on the buy side we have noticed that since MAR came in they have interpreted requirements very differently which has created a challenge for sell side firms because when it comes to areas like market soundings there are so many different approaches so what you do with one firm is not the same for someone else.

This lack of clarity in the market is causing problems but hopefully market practice overtime will develop and converge.

Jason: Do you also feel the elements of adding additional types of asset classes to MAR having an impact on sales?

Chris: Depending on the business model of the firm in question this is potentially a big issue or not much of an issue at all. Additionally, even though the asset classes covered has broadened I think this was the direction of travel anyway and so a lot of firms had already begun to adopt similar controls across the different asset classes,

From a surveillance perspective the industry has spent a lot of time and money on enhancing surveillance capabilities but again, this started pre MAR and the past 18 months or so has just seen an escalation of this in order to prepare for MAR.

That being said, in some instances I don’t think that technology hasn’t really caught up with requirements yet at least not in a satisfactory way.

Jason: On the basis of this is one of the challenges also around the absence of market data for certain types of instruments?

Chris: Yes that is certainly a challenge and there is a disconnect between requirements under MiFID and those currently required under MAR. You would hope that once MiFid II comes into force the increase in data will make certain MAR expectations more achievable but this will also bring its own challenge to fight through the noise.

At the moment though, it is fair to say that in respect of certain areas there is an absence of data which does cause challenges.

Jason: That is a good point as MiFid II is going to make it a lot more transparent with the consolidated tape and will assist MAR but obviously with the difference between the time it has made one more problematic than the other?

Chris: I agree although the regulators are aware of this and I understand that the FCA is realistic in terms of its expectations of firms in light of the practical difficulties with regard to an absence of reliable data in certain areas,

Firms have to take a pragmatic approach and do what they can to get themselves into as a good a position as possible but there is an expectation that this will evolve overtime and that post MiFid II we will likely see significant developments as a new data hits the market.

The message I have heard from the FCA and others is that there isn’t an unrealistic expectation in this regard and they are aware of what the challenges are.

Jason: Based on the conversations I have had it seems as though MAR is an evolution rather than a revolution?

Chris: That is right and is the nature of European regulation at the moment because there is so much of it and although the goals are fairly reasonable in theory sometimes they are very far reaching and these expectations take time to develop and introduce.

I was at a MiFid II conference yesterday and the comments were around the idea that on day one of MiFid II it isn’t all just going to drop into place at once and that it will take time for the market to develop and bed down to the new requirements.

This is also true of MAR where firms have worked hard but FCA have acknowledged that on day one some of these areas are going to be difficult and will take time to be implemented.

Jason: Has the whole cross product caused issues? MAR spells out that you are supposed to look at cross product manipulation between say fixed income and equity or swap and future. Have you found that the data has been available in order to make those connections?

Chris: Not particularly and at the moment we are predominantly relying on the analysis of the people reviewing our data and alerts. We are in some ways fortunate at a firm our size as have the same people within the Compliance surveillance team looking across the various asset classes and looking at both trade and communication data and so they are in a position to identify cross-product issues.

We haven’t seen a solution that seems to provide a satisfactory resolution to this problem at this stage.

Jason: Jan, what are your thoughts on this?

Jan: This isn’t my area of expertise but I know that there are areas that are not solved like the interpretation of investment recommendations and of closely viewed persons.

Jason: What are the areas that you feel need further clarity?

Chris: From a practical perspective the biggest area where we have seen a divergence of approaches is in relation to market soundings because most of the other parts of MAR are generally internalised, for example with surveillance, you have your own surveillance system in house so you can control and develop it yourself.

Whereas when it comes to market soundings you are reliant, to a certain extent, on the interpretation of others.

The divergence of approach is both buy side and sell side and so everyone is a little bit confused at the moment.

I don’t know if there is necessarily going to be much more clarity from the regulators but what I think is likely is that the market practice will develop and in 12 months’ time or so there will be a fairly standard approach that everyone uses but at the moment it is quite confusing for many people.

Jason: For your market sounding are you using some type of communication surveillance technology to help you with that?

Chris: No it is more of a process and it is an area where we did a lot of work with the front office to make sure that they understood the requirements as well as fed into our proposed solution as ultimately it is them who are going to have to implement it.

We had a lot of conversations with the front office guys to make sure that the scope of the problem was realised and the solutions well embedded as it ultimately relies on people following a process.

It isn’t so much a technology issue from a market sounding perspective as a general understanding and common approach that is needed.

Jason: It is then more of a procedural and training issue?

Chris: Exactly.

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