RegTech Intelligence

MAR: time to worry about your opinions

JWG’s Customer Data Management Group (CDMG) March focus was the soon to be implemented (3 July 2016) Market Abuse Regulation (MAR).

JWG have created a set of rule interpretations for MAR which have been incorporated into our regulatory platform, RegDelta.  The March CDMG also included a rule interpretation segment, where participants ‘deep-dived’ a few of the rules that we’d identified as potential ‘pain points’.  The new mandates and disclosure requirements for investment recommendations and investment strategies provoked a particularly lively discourse with participants concurring that deciphering what needed to be done was as big of a challenge as deciding on how to do it.

It will come as cold comfort, then, that the FT went further than this in an article published on 26/27 March, entitled “Pain ahead for the city as EU rules look set to gum up the machine.”

MAR’s rules on investment recommendations and strategies can be broken down into two broad areas: disclosures and mandates on recommendation and strategies and disclosures on conflicts of interest.

Recommendations/strategies: disclosures and mandates

The difficultly that firms are facing here is the sheer amount of work and effort that will go into making the required disclosures and putting in place processes that will be able to track who has said what to who and when.  A person may make dozens of recommendations each day over the phone or face to face – that’s how relationships between the sell-side and buy-side are nurtured.  To comply with MAR, the very essence of how business is conducted will need overhauling.

Investment recommendations and strategies will need to be presented in an objective and clear way and appropriate risk warnings will need to be attached.  A clear distinction will need to be made between hard facts and opinion, estimates or interpretations – and any forecasts and price projections will have to be labelled as such.  If any of the inputs are considered to be unreliable, these will have to be disclosed.

The issue is one of repetition and the question of objectivity – a recommendation will usually have an element of subjectivity, otherwise it is just output from some valuation model (which may itself contain subjective assumptions).

The valuation methodology used in arriving at the recommendations and strategies will need to be summarised.  If a proprietary model has been used, the whereabouts of information on that model needs to be disclosed.

A recommendation’s/strategy’s ‘history’ will need to be included, as will a history of recommendations made for that particular issuer or instrument – an incredibly difficult task.  How do you keep track of all conversations which may have contained a recommendation?

Where a recommendation is made using extracts from another recommendation, or when it is altered from the original, this must be made clear to the recipient, and there should be no attempt to mislead.

Conflicts of interest

A conflict of interest is defined as arising if relationships and circumstances exist that may reasonably be expected to impair the objectivity of the recommendation.  This captures commercial relationships (e.g., market making for the issuer’s instruments) through to positions/holdings that the recommender may have in the relevant issuer.

Any conflicts of interest will need to be disclosed in the recommendation, together with a description of any ‘Chinese walls’ designed to prevent conflicts of interest.

Again, the problem is the repetitiveness of the exercise, which will ultimately reduce efficiency and interaction between market participants.

That’s a lot of disclosures!

The technical standards do recognise that the new rules could overwhelm the act of providing a recommendation.  They have allowed for arrangements for disclosure methods to be adapted in the interest of “proportionality”, specifically mentioning non-written recommendations, as in meetings, video conferences or voice media.

Time is running out

As the sell-side attempts to piece together the practicalities of the new rules, there is more than a little unease at what was once considered simply as ‘voicing opinions’.  With the MAR deadline fast approaching, firms will need to form an opinion on how to comply.

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