The new Market Abuse Regulation (MAR) came into effect in July 2016. In its new iteration, MAR has significantly extended its scope and now captures financial instruments traded on all types of European trading venues and financial products (such as OTC and on-exchange derivatives) whose price or value is referenced to said financial instruments. Moreover, ‘inside information’ now also includes commodities and emission allowances.
Recent EU cases have shown that CFD brokers are particularly vulnerable to being used in illegal ‘insider dealing’ activities. For example, in 2018, an online broker in the UK was fined over £1m for failings in its post-trade systems and controls for identifying and reporting suspicious transactions. More specifically, the broker failed to detect two highly profitable CFD trades that potentially used inside information.
In light of the recent letter sent by CySEC to brokers assigning the completion of a form on the prevention of market abuse to their Internal Auditor, as well as the latest results of ESMA’s STOR Peer Review, regulatory oversight and enforcement over market abuse is expected to be tightened in Cyprus.
The requirements to prevent market abuse should not be viewed lightly or as a mere tick box exercise. Article 3 of the Commission Delegated Regulation (EU) 2016/957 provides that the arrangements, systems and procedures for the detection and identification of orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing, or market manipulation shall:
- Allow for the analysis, individually and comparatively, of each and every transaction executed and order placed, modified, cancelled or rejected in the systems of the trading venue and, in the case of persons professionally arranging or executing transactions, also outside a trading venue;
- Produce alerts indicating activities requiring further analysis for the purposes of detecting potential insider dealing or market manipulation or attempted insider dealing or market manipulation;
- Cover the full range of trading activities undertaken by the persons concerned.
The arrangements, systems and procedures shall be appropriate and proportionate to the scale, size and nature of the firm’s business activity. Upon request, firms shall provide CySEC with information that demonstrates their system’s appropriateness and proportionality, including data on the level of automation in place.
Is an automated trade surveillance system necessary?
ESMA believes that, in the majority of cases, the above-mentioned requirements for the prevention, monitoring and detection of market abuse will necessitate an automated surveillance system.
When considering whether or not an automated system is necessary and in assessing the level of automation required, investment firms operating a trading venue or professionally arranging or executing transactions in relation to in-scope financial instruments should take into account the following factors:
- Number of transactions and orders that need to be monitored;
- Type of financial instruments traded;
- Frequency and volume of orders and transactions, and;
- Size, complexity and/or nature of an entity’s business.
Based on the principle of proportionality, smaller and non-complex businesses could potentially establish a relatively simple automated system, whereas more complex and sophisticated entities might have to set up a more elaborate and bespoke system to comply with the relevant requirements under MAR.
How can MAP S.Platis assist you?
Our team of experts can offer you the following services:
- Advice on the selection and setup of automated trade surveillance systems.
- Advice on policies, controls and procedures relevant to the prevention of market abuse.
- Compliance monitoring programme updating.
- Professional training of staff members.
- Customised compliance health-check reviews and issuance of relevant reports.
Why MAP S.Platis?
MAP S.Platis is the leading financial services consulting group in Cyprus with clients which include regulators, banks, funds and fund managers, investment firms, insurance companies, and payment and electronic money institutions. Our expert team provides unique and tailored solutions in licensing, regulatory compliance, risk management, internal audit, human resources, banking, regulatory technology, executive training and innovation consulting to financial institutions in Cyprus and the EU. Thanks to our vast regulatory compliance experience supporting local and international financial services institutions, continued interaction with regulatory authorities, multidisciplinary and diverse team of professionals, unparalleled track record, global network of associates and wealth of resources, our internationally recognized and award-winning firm can support any client’s regulatory needs, both efficiently and effectively.
For more information on our services please contact our team at +357 2535 1335 or via email at email@example.com