MAR: Standardizing Communications for Compliance with New Regulations
The incoming Market Abuse Regulations (MAR) affect so 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 with the new regulations.
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 in Section 10 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 and I will return to this shortly. Perhaps there is a “get-out” in terms of who writes these communications? Unfortunately not. 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.
With compliance deadlines looming, it’s time to look at what Section 10 actually requires of banks. Does meeting MAR requirements simply mean re-training sales and trading staff to include very specific and required information in every single one of their communications to customers? Or does complying with MAR go beyond staff re-training?
Section 10 Requirements for Investment Recommendations
Investment requirements vary according to asset class but on the whole, the following information needs to be included:
- Time stamp for “when completed” i.e. at what specific time was the trade priced in the case of trade recommendations
- Name and position of person writing the recommendation as well as those having access to the recommendation before dissemination and the legal person (entity)
- Appropriate disclaimers for the product and asset class
- Disclosures of holdings (mainly for equities)
- Disclosure of related previous recommendations
- Additional disclosures for qualified persons or experts
- Additional requirements for qualified persons: basis of valuations, summary of methodology and clear communication of changes in that particular recommendation
- Clearly identified facts versus interpretations
Not all of these apply to all investment recommendations but many will. Consider hundreds of sales and trading staff sending or publishing recommendations to many customers, multiple times a day. It is highly unlikely that all such communications will meet the criteria, even with the best intentions. The effort to train sales and trading staff to select the appropriate disclaimers, find the right database for disclosures, and include a historic record of recommendations would require a significant change management project.
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.
Why Quark is Best Positioned to Solve the MAR Challenge
Quark’s content automation platform has been helping global financial services organisations meet exacting compliance requirements for many years in the areas of investment research, standard operating procedures and fund products to name a few. This includes managing thousands of information products and ensuring the necessary disclosures, auditing and distribution – all of which would go a long way towards making compliance with Section 10 easier for financial institutions. The burden of data regulations is something that Quark’s clients in equities research are already very familiar with. We have delivered solutions that author, manage, publish and deliver equity research content to some of the leading banks in the world.
The benefits, however, are not limited to compliance with the regulatory framework. As anyone who has sent or received regulated communication will attest, it very often lacks a professional or even appealing look and feel. Using a common content automation platform such as Quark’s would have the benefit of giving all these types of communication a standardised, branded and professional look, which further enhances reputation and customer satisfaction.
Finally, in an age where banks want to publish more and more dynamic web content, that is, HTML rather than a static PDFs, Quark enables investment recommendations to be published simultaneously to print, email and web without further work needed to optimise the content. In most cases today, this type of omni-channel publishing is done through manual processes that are time consuming and expensive. With a content automation platform, even omni-channel publishing can be automated to reach more clients with the right information at the right time. Banks might also consider using MAR as the jumping off point for automation of other business-critical content across the enterprise.
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.
The solution is to relieve sales teams and traders of the responsibility for making sure every single one of their investment recommendations complies with MAR. A content automation platform 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.
Andres Cuenca-Torres is a Regional Business Manager for Quark based in London. He has 18 years working in the financial industry helping banks and investment firms. His specific expertise is in sales and trading, compliance, risk management and navigating regulations as they relate to content creation and delivery. He can be reached at firstname.lastname@example.org.