Andres Cuenca-Torres, Regional Business Manager, Quark
The incoming Market Abuse Regulations (MAR) affect many aspects of day-to-day trading and sales activities that it is little wonder most international banks have assigned large teams to assess how they must change to maintain compliance.
Teams have generally been organised to deal with specific sections of the regulation, from reporting of suspicious trading activity and patterns to the establishment of procedures for disclosure. However, at the end of the Final Report for Technical Standards (ESMA 2015), in Section 10, are statements regarding standards expected for investment recommendations. From speaking to a number of large banks, internal compliance teams have paid relatively little attention to this particular section. One might ask why, when so many resources have been dedicated to MAR as a whole.
One reason could be that some banks already feel well prepared for MAR because they have large equity research operations. Section 10 could be interpreted as an extension of the strict standards equity research must already meet, to other wholesale financial products. These banks may feel they only need to extend their equity research framework to all other products where commentaries and trade ideas are communicated and that they have technology in place already.
Other banks seem to have decided that the standards are so difficult to meet that regulators will only want them to comply with the spirit of the regulation rather than the letter. This seems hopeful at best, given that the standards laid out are quite precise in defining what an investment recommendation must contain to be compliant.
Scope of MAR: Investment Recommendations
Our starting point is to examine the scope of the regulation. That’s simple enough because the regulation includes every instrument and asset class. Practically every traded instrument, whether exchange traded or over-the-counter, “cash” or derivative, FX, credit or interest rate-based, will be covered by the regulation.
Possibly even more important with regards to scope is what exactly is deemed to be an investment recommendation. This is harder to interpret though the general consensus seems to be that, again, a wide array of communications will be in scope. Market commentaries, trading ideas, and weekly strategy publications will all fall under the MAR umbrella. This is at the heart of the problem that must be solved. There is no “get-out” in terms of who writes these communications. Though the terminology around “qualified”, “non-qualified”, and “experts” can be confusing, in the end, market-related communications produced by any of these would be in scope.
Finally, the method of dissemination is taken into account, but this offers little respite. “Intended for distribution channel or to the public” might offer some hope that a sales person sending a trade idea to one or maybe a small number of hedge funds would not be construed as being available to the public. Not so.
If information is “available or likely to become available to the public”, then it is deemed in scope. Whereas equivalent US legislation sets a number of recipients above which the communication is deemed to be publicly available, the European Securities and Markets Authority (ESMA) simply believes that any email or any idea on a website can easily be reproduced and made available for public consumption. Whether you send ideas or commentaries through a chat system, email, or website, those communications will have to meet the standards set out by ESMA.
Why Section 10 of MAR is a Challenge for Banks
We suspect Section 10 will be applied to all instruments and asset classes, whether in a trade idea or market commentary, no matter who writes it or how it is distributed. For a bank with large wholesale operations, we are looking at hundreds, perhaps thousands, of communications being in scope per day. Think of all the sales people whose job it is to inform clients of market activity and suggest ideas to capitalise on anticipated market movements, and you will start to get an idea of the scale of the potential problem.
Potential Solutions: Automating Investment Recommendation Production with Smart Content
Outside of having impeccably trained staff, a potential solution would be to take the responsibility for meeting MAR requirements away from the sales and trading team altogether. This can be done through automation. An automated process that recognises the author, time, securities, and other such data involved in the recommendation has two huge advantages.
Firstly, it means that all the data required for a recommendation will be automatically – and correctly – populated into the recommendation at the time it is created. Secondly, it will mean that people putting out the recommendations will be able to concentrate on what they do best, that is, generating ideas or interpreting market conditions. Compare this with the alternative, which is to ask the sales and trading team to add this information manually, which no doubt leads to inaccuracies and risk.
So how do you automate this process?
Some well-meaning IT professionals might suggest the option of using macros to meet this challenge. Macros are sets of instructions that can be called to automatically perform a specific task. This would present various challenges from the fragility of macros themselves to how you manage their rollout across a distributed workforce and maintain, update, track and audit all of the necessary conditional content – such as disclosures. When regulatory compliance is at stake, this would be a high-risk automation solution. The right approach is an emerging technology category called content automation.
A content automation platform can relieve sales teams and traders of the responsibility for making sure every single one of their investment recommendations complies with MAR. It can do this by populating a recommendation with all required information at the point at which it is created. Based on input from the author, a content automation platform uses business rules to recognise and implement the correct data. This happens behind the scenes so the trader can publish and deliver recommendations with confidence, which is a far cry from the risky processes at work today. Ultimately, it’s time to recognise that yesterday’s approaches are no longer good enough for today’s highly-regulated environment.
MAR places a very heavy burden on sales and trading staff to make a lot of decisions on what should be included in even the simplest and shortest investment recommendations. At best, staff will do this correctly but it will take them a very long time to add all the necessary data, impacting their productivity. At worst, they will get it wrong and the material will be deemed non-compliant, putting banks at a high risk for losses, both from claims made by clients and penalties issued by regulators. With a content automation platform, even omni-channel publishing can be automated to reach clients with the right information at the right time and banks might also consider using MAR as the jumping off point for automation of other business-critical content across the enterprise.
For more information on how Quark can help your organisation automate content please visit: http://www.quark.co.uk/