White Paper. Implementing the Market Abuse Regulation (MAR) and Market Abuse Directive (MAD II)

Transcription

1 White Paper Implementing the Market Abuse Regulation (MAR) and Market Abuse Directive (MAD II)

2 White Paper: Implementing MAR and MAD II Table of contents Introduction Regulatory Requirements How to implement the Market Abuse Regulation (MAR) and Market Abuse Directive (MAD II) Implementing ESMA recommendations, guidelines and technical standards Compliance with the Swiss FINMA circular 2013/ Compliance with required measures Monitoring market manipulation scenarios Monitoring insider scenarios Monitoring against insider lists Monitoring employee transactions, enforcing behavioral rules Reducing implementation and operating costs Conclusion /2016 ACTICO GmbH. All rights reserved, also regarding any disposal, exploitation, reproduction, editing, distribution, as well as in the event of applications for industrial property rights. Page 2

3 1 Introduction This white paper examines the regulatory requirements in the EU and Switzerland to prevent market abuse and explains the required measures. Several examples show how these regulations can be implemented, especially under the aspect of cost reduction. 2 Regulatory Requirements Due to the new rules of the European Market Abuse Regulation (MAR) and European Market Abuse Directive (MAD II) plus the new recommendations, guidelines and technical standards, the monitoring of the trade in financial instruments has become more extensive. The FINMA in Switzerland has implemented this through its circular 2013/8 on the rules of conduct in the market. 2.1 How to implement the Market Abuse Regulation (MAR) and Market Abuse Directive (MAD II) The European Parliament and the Council of the European Union (EU) published the guideline 2014/57/EU concerning the prosecution in case of market abuse (Market Abuse Directive MAD II). In addition, they published EU regulation 596/2014 concerning market abuse (Market Abuse Regulation MAR). This happened because the guidelines in the original Market Abuse Guideline 2003/6/EG (MAD) were considered not to be sufficient. The monitoring of the trade in financial instruments has become more extensive, and now affects more institutions, markets, and instruments than before. National regulations and laws must be adapted in the EU countries. Now, institutions that were not included in the past are obliged to act and institutions with existing measures need to extend these. Most of the requirements of the European Market Abuse Regulation (MAR) apply from July 2016 in the EU. The Market Abuse Directive (MAD II) does not regulate the same aspects as MAD I, but focuses on criminal sanctions. MAD I is replaced primarily by the Market Abuse Regulation (MAR). MAR requires the following measures (among others): Prevention of market abuse and insider dealing by all operators of markets and professional brokers of transactions Keeping insider lists by issuers Monitoring of restrictions for employees, for example closed periods before the publication of interim reports and annual reports Clarification and reporting of suspicious orders and transactions in a traceable manner with retention periods The Securities and Markets Authority (ESMA) has been authorized to provide recommendations, guidelines and technical standards of the measures. White Paper: Implementing MAR and MAD II Page 3

4 2.2 Implementing ESMA recommendations, guidelines and technical standards The European Securities and Markets Authority (ESMA) has submitted the following recommendations, guidelines and technical standards based on MAR: Guidelines Technical Standards Technical Advice The technical standards include information as to which suspicious orders and transactions must be reported and how the insider list must be kept. The recommendations amplify the indicators for market abuse. They are explained in the appendix of MAR. According to MAR, these indicators and examples are not final and must be individually adapted to the circumstances of the company. 2.3 Compliance with the Swiss FINMA circular 2013/8 The market conduct rules for stock trading in Switzerland have been determined by the Swiss Financial Market Supervisory Authority (FINMA) in circular 2013/8. The circular regulates measures against taking advantage of insider information, market manipulation and market abuse. Among others, the following measures are required: Handling abusive methods Information barriers / Areas of trust Monitoring of employees business Watch List and Restricted List They had to be implemented by January 1 st Until then, FINMA circular 08/38 was compulsory. White Paper: Implementing MAR and MAD II Page 4

5 3 Compliance with required measures The measures must be implemented in accordance with the regulatory requirements. The measures differ according to the type of business of a financial institution. Regulatory Specification Regulatorische Vorgabe Requirements Anforderung Measures to meet the requirements using the software module MAID Protection against market manipulation Monitoring of manipulation scenarios Market Abuse Regulation (MAR) Protection against insider dealing Monitoring of insider scenarios Monitoring against insider lists Banks behavioral code Monitoring of behavioral code Stopp Listing External and internal requests Historical evaluations Permanent monitoring Fig. 1: Measures in accordance with regulatory requirements The measures are covered by the Market Abuse and Insider Dealing Detection software (MAID) in the ACTICO Compliance Suite. In addition to the measures listed below, case specific analyses are feasible both on a historical basis or on a permanent basis for current orders. Every single clarification is documented in a traceable way. White Paper: Implementing MAR and MAD II Page 5

6 3.1 Monitoring market manipulation scenarios Financial enterprises have to detect market manipulation. They must identify indicators pointing to manipulation scenarios. The scenarios and indicators have to be adapted individually based on the general circumstances of the company. Here is an example: At marking the close, someone tries to reach a particular market value at a particular point in time in order to take advantage of the rating of another financial instrument. An indicator for this case is when a high volume compared to the market size is dealt shortly before the close of the exchange. Overview of Market Abuse Scenarios Colluding in the aftermarket of an IPO Creation of a floor or ceiling in the price pattern Ping orders Phishing Abusive squeeze Inter-trading venue manipulation Cross product manipulation Wash trades Painting the tape Improper matched orders Concealing ownership Pump and dump Trash and cash Quote stuffing Momentum ignition Marking the close Layering and spoofing Advancing the bid Smoking Placing orders with no intention to execute them (more) Fig. 2: Examples for market abuse scenarios White Paper: Implementing MAR and MAD II Page 6

7 3.2 Monitoring insider scenarios Financial enterprises also have a duty to identify potential insider trading. It is possible to use the same pattern as for detecting market manipulation. In addition, a matching against the internal insider list can be executed. For monitoring, certain indicators are identified which indicate manipulation scenarios. The scenarios and indicators must be adapted individually according to the general circumstances of the company. Typical examples for insider dealing are Front and Parallel Running. Someone places a smaller order ahead of a larger order for the same security in the same direction because the person knew the larger order will come. This can be done for an own account, a bank account or even a client account. 3.3 Monitoring against insider lists Insider knowledge arises in many areas of an institution in attending to the requirements of customers. Issuers must keep a list of their insiders. Insider trading arises wherever insider information is exploited by employees for private securities transactions or the credit institution s own trading. It is prosecuted internationally with fines or imprisonment. Therefore, companies must identify possible insider dealings prematurely. The Market Abuse and Insider Dealing Detection (MAID) module of the ACTICO Compliance Suite is able to keep an insider list and run a comparison with the orders. If instruments are traded in respect of which insider knowledge exists, this is reported. Underlyings are considered, too. It is recommended to monitor orders of primary insiders in particular. A primary insider is a person who possesses inside information by virtue of his position, employment or responsibilities. 3.4 Monitoring employee transactions, enforcing behavioral rules Banks require more security in respect of compliance with the rules on trading transactions by their employees. They accordingly implement systems that enable audit-proof documentation and analysis. The core is the analysis of the securities transactions of the employees. In doing so, thirdparty bank transactions or general restrictions, such as minimum retention periods, are inspected, or trade bans in respect of certain instruments (for example, prior to the publication of annual reports) are indicated. The MAID (Market Abuse and Insider Dealing Detection) software module enables financial institutions to register employee transactions with third-party banks and investigate these. In addition, it also allows the inspection of employee orders prior to their appointment, as part of a pre-clearance. White Paper: Implementing MAR and MAD II Page 7

8 4 Reducing implementation and operating costs Expenses can be significantly reduced in three points: The use of a standard software like the ACTICO Compliance Suite reduces the implementation costs. The use of standard monitoring rules reduces the expenditure for control measures. Optimizing control measures with regard to the specific business of a bank reduces the number of unnecessary matches (false positives). With respect to these aspects, a reduction of the financial investment during the whole lifetime of the software is possible. The aim is to cover the regulatory requirements and to reduce the monitoring effort by minimizing misreporting. This effect can be intensified even more if a review and a supplementary optimization are executed several months after going live. Standard Rules Simulation Optimization Live Review Fig. 3: Reduction of the implementation and operating costs by using standard rules and minimizing false positives 5 Conclusion The measures explained in this white paper refer to the regulation in the EU and Switzerland in order to combat market abuse. These measures can be implemented while focusing on reducing the costs. Financial institutes start this process from different starting points. If they implement anti-marketabuse measures for the first time, it is important to comply with all regulatory requirements. If MAD I regulations are already in place there is a limited need for action. In this case it might be reasonable though to replace a rigid system by a flexible software solution. White Paper: Implementing MAR and MAD II Page 8

9 ACTICO EMEA ACTICO GmbH Ziegelei Immenstaad Germany info@actico.com Americas ACTICO Corp. 200 S. Wacker Dr. Suite 3100 Chicago, IL 60606/USA info@actico.com Asia & Pacific ACTICO Pte. Ltd. 11 Bishan Street 21 Singapore info@actico.com ACTICO is a leading international provider of software solutions and technologies for decision management. In a digital world it is necessary to process large volumes of data and make fast, consistent and auditable decisions; that is where our software solutions provide an advantage. Business rules and processes can be easily adapted and executed automatically, which improves the efficiency and agility of our customers in their competitive area. This also enables them to accelerate their growth, innovate effectively, stay compliant and as a result, increase profits. ACTICO provides software solutions for the areas: Credit Risk Management: Assess and monitor credit risk Loan Origination: Automate credit checks and decisions Compliance: Enable transparency, comply with regulations and avoid fraud Claims Management: Make claim settlement processes quicker, consistent and costeffective Client Management: Handle sensitive customer data securely from onboarding to reporting ACTICO s roots go back to 1997 and Innovation Software Technology GmbH, which became part of the Bosch group in ACTICO was formed when Bosch spun off its financial software operations in November As an independent company, it supports its international customers from locations in Germany, the U.S. and Singapore. More information: White Paper: Implementing MAR and MAD II Page 9