Upcoming Market Abuse Regulation Changes, How Can Brokers Prepare?

Spot FX contracts might be brought into the scope, which will create more compliance costs for brokers.

The Market Abuse Regulation (MAR) has been in place on a European Union level since 2016, and it aims to increase market integrity and investor protection. The regulation is currently under examination, so what might this mean for CFD brokers?

As it stands now, the regulation includes financial instruments trading on all types of European trading venues and financial products whose price or value is referenced to said financial instruments. Therefore, over-the-counter (OTC) and on-exchange derivatives fall within its scope.

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With this regulation expected to be tightened, Finance Magnates caught up with Alexandros Constantinou, Director of MAP S.Platis, to learn more about what brokers should be preparing for.

Will Spot FX contracts be included in the MAR scope?

Constantinou explained to Finance Magnates the changes that brokers should be preparing for: “The EU has established a quite demanding and robust regulatory framework to prevent market abuse. Together with the market abuse regulation, EU Member States have enacted very strict local legislation regarding the imposition of criminal sanctions in case of financial market abuse.”

“Moreover, the EU is currently examining the possible revision of the existing regulatory framework on market abuse to strengthen it even further. Areas being discussed include, among others, expansion of its scope to include spot FX contracts, revision of certain definitions and the establishment of a cross-market order book surveillance framework.”

As highlighted by Constantinou, should spot FX contracts (including FX Derivatives) be brought into the scope of the regulation, this is likely to significantly affect CFD brokers, as they will need to actively monitor the FX transactions executed by their clients for possible insider dealing and market manipulation.

This will probably result in an increased operational burden for many brokers. However, Constantinou points out that there are automated solutions and compliance assistance that can be provided to CFD brokers to help them cope with the possible change.

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Regulators are actively pushing for compliance

“Competent authorities should already be doing reviews/inspections to check whether regulated entities comply with the revised market abuse regulation,” outlined Constantinou.

“But it seems some competent authorities have not been active in doing so. However, the past months we observe more actions by regulators such as the Cyprus Securities and Exchange Commission (CySEC) to review and inspect whether regulated entities comply with the market abuse regulation.”

Whilst the regulation is currently under review, it is likely that COVID-19 could delay the implementation of the stricter regulations, as many regulators have had to shift their priorities to ensure their markets remain stable amid this global pandemic.

“As such, in the short term, regulatory enforcement and oversight from competent authorities as regards compliance with the market abuse regulation may not be a top priority,” Constantinou commented.

“Nevertheless, this does not mean regulated entities must not always comply with the said regulation’s requirements. At the same time, given the impact of COVID-19 on the market, regulators are expecting that market disclosure of inside information where applicable is followed at all times and it is expected that regulators will be active in monitoring this area.”

What can brokers do now?

So with the MAR set to be updated, what can brokers do in order to be ready for when the new regulations come into force? According to Constantinou, brokers should ensure that they are already complying with the current regulation as it stands.

“As regards CFD brokers, our view is that they are particularly vulnerable to being used in illegal ‘insider dealing’ activities, but this depends on the operating model and products of each broker. In every event, it is a prudent that brokers review their existing arrangements to prevent market abuse and make sure they fully comply with the requirements of the regulation,” he added.

“In fact, due to the latest heightened awareness as regards the market abuse regulation, we have seen an increase in requests by CFD Brokers to assist, among others, with the selection and setup of automated trade surveillance systems, conduct compliance health-check reviews and issuance of relevant reports, advice on policies, controls and procedures relevant to the prevention of market abuse and provide professional training.”

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