BY: ComplyLog|March 21, 2022|Employee Trade Monitoring
Having a robust pre-trade clearance system is essential for investment firms with regard to compliance with the Market Abuse Regulation (MAR) and Markets in Financial Instruments Directive II (MiFID II). It can prevent your employees from making trades using inside information and from creating conflicts of interest with either your organisation or your clients.
Allowing these activities to occur within your organisation can cause severe reputational damage, lead to losing trust and put your business at risk of incurring financial penalties. The current maximum Market Abuse Regulation penalties are:
|Violation||Fine for a Natural Person||Fine for a Legal Person|
|Failing to disclose potential conflicts of interest when making investment recommendations||Up to €500,000||Up to €1,00,000|
|Insider dealing||Up to €5,000,000||Up to €15,000,000 or 15% of the annual turnover from the last available accounts|
Table of Contents
III) Benefits of a Pre-Trade Clearance System
IV) The 5 Essential Features of a Pre-Trade Clearance System
Why use a pre-trade clearance system?
By running employee personal trades through a pre-clearance system that can flag potential problems before the purchase or sale is made, you can help avoid market abuse fines and other penalties.
However, you also need a process that allows trades to take place in good time and without tying your compliance function up with manual investigation work. A pre-trade clearance system helps you reduce the administrative burden while securing your compliance with all relevant legislation on financial crime.
In this article, we go through the features your pre-trade clearance system should possess to help you stay compliant.
MiFID II states that: “an investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons.”
Personal transactions, in this context, usually relates to any trade that your employees carry out that is beyond the scope of their regular work. However, it is not just the employee, or ‘relevant person’, as they are often referred to. According to Article 16(2) of MiFID, submitting a pre-clearance request also applies to:
Using an automated pre-trade clearance system saves time for both parties when it comes to personal trading. For the compliance department, they can set up the system with necessary rules relating to automatic approval or denial. This means that the Chief Compliance Officer (CCO) and their team can allow or deny the trade immediately, depending on where it sits in terms of the set parameters. They don’t need to dedicate time to examine the details of every single trade request.
For relevant persons, they can get an answer in good time, allowing them to make their trade more quickly if the pre-clearance process approves it. They don’t have to wait for it to reach the top of the inbox of the compliance team before receiving an answer.
An online platform eliminates the need for a paper-based process that can lead to requests going missing or being filed in the incorrect place. By entering the details of the proposed trade into a digital tool, the employee knows that their request is in the system and has been registered.
This also acts as an audit trail. The process captures all actions taken, from the initial request to the approval or denial and any notifications of violations that it picks up. Everything is recorded and easily accessible from your dashboard so that you can immediately find proof that you acted in a compliant manner and took the relevant actions when needed. With a paper process, this requires a lot more manual work to maintain and provides a much greater risk of misplacing key evidence.
A digital solution for personal trade approval is easy for employees to use and understand. The system guides them through the process and gives them timely answers. It is also a chance to communicate with the compliance team and gain a better understanding of what would constitute prohibited trades. It acts as a central database of everything they need to know and understand about personal trading.
Automation simplifies the process of compliance on behalf of the organisation, allowing you to be confident that you are working within the laws and regulations set down. It also helps to eliminate manual errors that could lead the organisation to be issued with financial penalties. When monitoring occurs using electronic capture, you increase the accuracy of your process.
The perfect pre-trade clearance system should contain the following features to ensure ease of use and compliance with the regulations.
You should be able to set rules and parameters relating to what represents compliant trades for your employees so that the system can approve or decline their requests. These rules also allow for ongoing surveillance of trades and can notify the compliance function if there is a violation.
For example, you might have:
Restrictions when it comes to trading in the organisation’s own securities
Having these parameters in place means that compliance team members do not need to spend time and resources manually monitoring every trade whenever the rules change, a product enters a blackout period, the company accesses inside information or similar.
Instead, pre-clearance prevents employees from entering into non-compliant trades. At the same time, the violation alerts, sparked when a trade is outside the set parameters and rules relating to company policies, allow you to instantly identify non-compliant trades and resolve the contravention.
An analytical dashboard is an essential tool to help you visualise your personal trading compliance efforts. The figures and charts on the dashboard tell you the status of your cases, including:
The reason that MiFID II and MAR in the EU and UK, and the Investment Adviser Codes of Ethics in the US, exist is to instil confidence in the financial markets. As such, you need to ensure you are compliant with the legislation in your territory.
The ideal pre-clearance system would allow you to configure the rules to meet the legislation in your country and provide the evidence that you need as part of the audit trail should there be an investigation by the national competent authority (NCA).
Reporting is essential to ensure that your compliance regime is robust enough to help you work within the law. In a paper process, this requires many different forms to be filled in, checked and rechecked again. You must draw multiple data points from your archives of current and historical pre-clearances and analyse them to make certain that all is in order.
With an online pre-clearance tool like TradeLog, you can generate standard compliance reports using the information stored within the platform at a moment’s notice. If you want to delve further into how your processes are working, the platform will also allow you to customise your reports.
This enables you to make changes, if necessary, and to provide the necessary evidence to prove you are making every possible effort to be compliant.
Data security is key when working with digital tools, especially those dealing with financial transactions. Employees should be confident that their privacy is not invaded and that only authorised professionals have access to information on the trades that they make or wish to make.
Check the security credentials of any tool that you use for reviewing employee pre-clearance requests, as all parties need to trust the solution that you use in order for the process to work as it should.
MiFID II says that investment firms should have in place “policies and procedures sufficient to ensure compliance of the firm” with relation to personal trades. As there are many pitfalls of not having a robust policy in place, it is important that there is a set process for dealing with pre-clearance trade requests. This is why the answer to this question is that it is a good practice to have a pre-trade clearance policy.
Consultancy firm Mindtree sets out a pre-trade requests clearance policy in Clause 8 of its Code of Conduct for Prevention of Insider Trading in the Securities of Mindtree Limited.
If an employee does not seek clearance for a trade, they might find themselves in contravention of the company’s policies at the very least. At worst, they could make a trade that contravenes the laws on insider dealing and create conflicts of interest with clients. These trade violations can lead to financial penalties and reputational damage.
Your pre-trade clearance system should work for you in order to strengthen your compliance efforts while making life easier for your compliance department. Embracing automation and paperless working should be coupled with advanced security to protect your organisation’s sensitive information.
Digital pre-trade clearance systems also give employees the ability to raise reports within minutes, allowing them to make their trades swiftly, safe in the knowledge that they are within acceptable rules when it comes to the relevant legislation. At the same time, the collected data save compliance officers a lot of precious hours.
If you want to experience a pre-trade clearance system that makes the process seamless, try a free demo of TradeLog.