BY: ComplyLog|May 9, 2022|General Compliance
“The financial crisis highlighted the need for better regulation and supervision of the financial sector. It is the reason why the European Commission has since 2010 proposed nearly 30 sets of rules to ensure all financial actors, products and markets are appropriately regulated and efficiently supervised”.
This article explores the effect of MiFID II and market abuse efforts in general within the union.
Although the Market Abuse Regulation (MAR) is the European Union’s flagship piece of anti-market abuse legislation, the Markets in Financial Instruments Directive (MiFID II) also contains some important provisions for ensuring the integrity of the continent’s financial system and boosting investor confidence.
Table of Contents
I) How does MiFID II relate to market abuse?
IV) Challenges for organisations
One of the major reasons for MiFID II’s existence is to promote investor protection. It does that in part through attempting to prevent or uncover practices that could amount to market abuse.
MiFID II states that “the management body of an investment firm defines, oversees and is accountable for the implementation of the governance arrangements that ensure effective and prudent management of the investment firm including the segregation of duties in the investment firm and the prevention of conflicts of interest, and in a manner that promotes the integrity of the market and the interest of clients”.
Conflicts of interest allow market abuse to flourish, which makes this provision relating to governance so important. It places the onus on the management of each company to prevent these activities from happening, rather than purely highlighting any individuals.
One requirement in the directive prescribes that financial market participants should “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”.
A key driver behind this article is to prevent investment firm employees from benefitting from inside information that they might have picked up in the course of their work. If a firm has access to the inside information of a client, its procedures should automatically prevent employees from making personal (or professional) trades relating to the product the information refers to.
MiFID II also demands that “an investment firm shall arrange for records to be kept of all services, activities and transactions undertaken by it which shall be sufficient to enable the competent authority to fulfil its supervisory tasks and to perform the enforcement actions under this Directive”.
Keeping records of all conversations, digital and oral, during the life cycle of a trade helps investigators look into suspicious behaviour and uncover illegality.
The directive requires that investment firms “take all sufficient steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order”.
In other words, they should not use their clients’ money to make trades that benefit themselves or their network, for example. Each deal should be placed with only the end result for the client in mind. This protects the investor and prevents abuse of the market for the benefit of others.
MiFID II and MAR combine to place multiple obligations on the financial markets and to make them more transparent and fair. They intertwine in places, as part of the market abuse regime, particularly when it comes to the unlawful disclosure of inside information and insider dealing.
The requirement for insider lists in MAR would apply to an investment firm whose employees’ personal trades are being monitored under MiFID II after they have been exposed to inside information. The firm would have its own insider list for that piece of information, and each employee with access to the information would be added to the list and reminded of their obligations not to use it to inform trades or to unlawfully disclose it.
With a robust employee trading procedure in place, you would receive a notification if an insider requested pre-clearance on an affected trade and you could decline it immediately.
Compliance software helps you remain within the law relating to both pieces of legislation when it comes to market abuse risks. InsiderLog automates the processes of notifying insiders that they are on the list and reminds them until they respond and acknowledge their responsibilities. TradeLog allows you to set your parameters for pre-clearance to prevent trades that would contravene MiFID II.
|Capturing||Investment firms need to capture records of telephone calls, electronic messages and face-to-face meetings that relate to transactions made for a financial instrument, or transactions that were intended to be made. These transactions could be those made for clients and in a personal capacity, pre-trade, trade and post-trade.
This requires financial institutions to either supply the equipment needed for employees to make recordings or to approve the use of the employees’ own equipment, as long as they remain compliant.
Records must be kept on a durable medium, featuring unaltered data in a searchable format that ensures they are accessible and readily available upon request.
|Monitoring||You should monitor your employees’ trades in a manner that allows you to collect data and ensure that they do not form a conflict of interest with your clients or rely on inside information. This helps you spot potential market abuse.
Pre-clearance processes should be created to automatically compare the suggested trade against your allowable parameters, as well as post-trade rules that check, review and verify the transaction. This will flag up any violations so your compliance function can step in.
|Providing evidence||Having captured records of the various conversations surrounding the trade, you must be able to reconstruct events if the national competent authority (NCA) requires you to.
This acts as proof that you are alert to the issue of market abuse and have recorded the correct details.
The sheer volume of requirements relating to market abuse within MiFID II can cause headaches for compliance departments, who must keep on top of all of them. Tracking all of the above requirements takes a large number of resources and time.
The record-keeping requirements in MiFID II require capturing all information on trades that have been made as well as those that didn’t happen. With trades that do complete, companies will typically already retain the details anyway. However, they are not used to maintaining records of those that do not.
Personal mobile phone use is common for employees of financial institutions, as it is in most jobs. However, being able to record conversations about transactions in order to comply with the requirements of MiFID II when using personal devices can be tricky. Work phones can easily be set up to accurately retain records, and companies need to transfer this capability to personal phones if the firm allows employees to use their own equipment.
Firms must sort through both structured and unstructured data across multiple data types and formats in order to accurately reconstruct the life cycle of a particular trade should the NCA request it. This is time-consuming and resource-intensive but is also essential for compliance if there is a suspicious transaction.
MiFID II requires the retention of a large amount of data, including detailed records of how a trade came about and was completed. This means that you have to be conscious of the General Data Protection Regulation (GDPR). There are strict rules over how long you can keep the data, which must be long enough so that it can be used as evidence in the event of an investigation, but not so long as to infringe on the rights of the individuals whose data you are holding.
Any financial instrument that is traded on European regulated markets, on an organised trading facility (OTF), multilateral trading facility (MTF) or other trading venues is affected by MiFID II. This is to ensure market integrity through developing accepted market practices.
You should find a recording solution that fits with the manner in which your employees conduct their trades. An encryptable cloud-based system means that you do not need to worry about issues with your internal storage and that your records will be safe.
Companies must monitor trades to ensure that they remain compliant with the directive as part of the EU’s market abuse regime. Trades by employees should not present a conflict of interest or utilise inside information. You must also record all details of trades for clients in order to be able to reconstruct the trade should the need arise.
When it comes to MiFID II and market abuse requirements, there is a large administrative load on financial market participants. However, the capturing, monitoring and evidence provision are key to making the markets more transparent and trustworthy, avoiding market manipulation, spotting suspicious transactions and more.
These requirements were a key driver behind the directive and the reason why compliance is so complex, ranging from preventing the unlawful disclosure of inside information to monitoring employee trades. However, there are ways to streamline the processes that help you remain compliant.
TradeLog automatically accepts or declines pre-clearance requests from employees and notifies you of any violations so that you can ensure they fit within your parameters. Request a demo of TradeLog today.