We spoke with Darryl Cornelius, Head of European Regulatory Projects at State Street Global Advisors, about the forthcoming Market Abuse Directive.
For the uninitiated, what is MAD all about? What are the key points for asset managers?
The currently applicable Market Abuse Directive (MAD) was adopted in 2003 and established an EU-wide framework for tackling both insider dealing and market manipulation. Following the financial crisis, the EU reviewed MAD and proposed that the regime should be updated and strengthened. This resulted in the adoption, in April 2014, of a new Market Abuse Regulation (MAR) and a new Directive on criminal sanctions (MAD II, also known as the Criminal Sanctions for Market Abuse Directive or CSMAD). MAR contains very detailed definitions and descriptions of what constitutes insider dealing /abusive behaviour, and controls/procedures required of investment firms/venues. It also covers the reporting of suspicious transactions to regulators and administrative sanctions. It will become effective on 3 July 2016.
From an asset manager’s perspective, it’s worth noting that the scope of MAD/MAR applies to EU financial instruments and so has extra-territorial effect. Firms are upgrading their monitoring and surveillance capabilities, updating policies and procedures to incorporate the new offences of colluding and attempting to commit market abuse or insider dealing, reviewing their approach to receiving market soundings, and refreshing training for their staff.
On a scale of one to MiFID 2, how big of an impact would you say the MAD will have on the industry?
It’s not quite MiFID 2, but its impact is pretty big. The extra-territorial scope I referred to above adds an extra layer of complexity for global firms, and I think the implementation and approach will be subject to significant regulatory scrutiny over the next couple of years.
Why do you think there has been relatively little buzz about MAD?
MAD/MAR has definitely crept up on us! During 2015 I think the majority of firms were consumed by the fear that MiFID was due to come into effect on 3 January 2017, and therefore were focussing resources on evaluating MiFID’s impact given the (then) very limited implementation window. Irrespective of the rigour you might place around regulatory change, it is very difficult for asset managers to navigate the current regulatory agenda given its complexity and the number of initiatives out there.
What was the biggest challenge in getting ready for MAD?
For us, it was ensuring that our monitoring and surveillance tools will have a reasonable chance of detecting the numerous types of abusive behaviours identified by ESMA. We carried out a gap analysis against our existing capabilities to identify our requirements, developed new reports as appropriate and integrated them into our day to day procedures. We also looked at the risks, both inherent and residual, that those behaviours could occur at SSGA Given that MAD/MAR covers all financial institutions, we did find that certain abusive practices were more likely to occur on the sell side or indeed that SSGA could be on the receiving end of abuse.
In general, do you think the industry is fully prepared for the July live date?
I think that would be a brave statement, but the industry will find a way to get over the line. In some cases, the solutions may be temporary or tactical whilst complex IT builds are implemented and procedures will continue to be tweaked/tailored as they become more embedded in daily operations. In others, such as for market soundings, we are still waiting for final guidance from ESMA so there will be more work to do after 3 July.
Finally, who do you think is going to win the Europe 2016 soccerball championship?
“Soccerball”? Whilst my heart would say England, I’ve no doubt we’ll be knocked out in the semi-finals on penalties by Germany, so I’d have to say France.
Darryl joined SSGA in June 2014 and is responsible for evaluating the impact of and implementing responses to major regulatory initiatives for SSGA’s European operations. Prior to joining SSGA, he held a similar role at Insight Investment. He has over 20 years’ professional experience, including product development positions at PIMCO and Barclays Global Investors. He trained as chartered accountant with PriceWaterhouseCoopers.