Compliant Communication: ESMA’s Guidance for Safe Pre-Close Calls

On 22 November 2024, ESMA published a Final Report on its Guidelines regarding the requirement for Market Soundings to be recorded. These guidelines introduce new recording obligations for Disclosing Market Participants (DMPs) when conducting market soundings, emphasising the importance of appropriate record-keeping to prevent market abuse. In this blog, we'll break down the key elements of these guidelines, explore their implications for firms, and explain how eflow can help you navigate the associated compliance challenges.

What's changing?

Market soundings involve the disclosure of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it (such as its potential size or pricing). A market sounding is a crucial step in the transaction process that helps issuers and their agents assess market appetite before committing to a deal.

Under the new guidelines, which take effect three months from publication, DMPs must record all communications related to market soundings. This applies to both instances where inside information is disclosed and those where it is not.

This includes communication via phone conversations, video conferencing, and face-to-face meetings. The guidelines also retain the existing provision for electronic communications to be recorded, but extend the scope to ensure that all forms of market sounding interactions are appropriately documented.

Key takeaways from the ESMA Guidelines

Mandatory recording of communications

DMPs must record all communications, whether or not they involve inside information. This includes phone, video calls, and face-to-face interactions. For face-to-face meetings, DMPs must prepare written minutes or notes that are agreed upon by both the DMP and the person receiving the market sounding.

Enhanced compliance for eComms

Electronic communications must already be recorded under the Market Abuse Regulation (MAR), but these guidelines reinforce the importance of consistent and thorough recording practices. Firms must ensure that all relevant channels are captured and retain recordings for a minimum of five years.

Flexibility in implementation

ESMA acknowledges differences between national implementations and has adopted a principles-based approach. Firms must ensure compliance with the recording requirements, regardless of the specific method used. This flexibility allows firms to adapt recording practices to their internal processes while still meeting ESMA's expectations.

Focus on market integrity

These guidelines are designed to strengthen the integrity of the market sounding process. By requiring comprehensive recordings, ESMA aims to create a reliable audit trail that can be used by regulators to detect and investigate potential market abuse.

Implications for firms

These guidelines will have far-reaching implications for firms engaged in market soundings:

• Operational adjustments: Firms will need to update their systems and processes to ensure that all market sounding communications are recorded. This may require investment in new recording technologies, including solutions for video conferencing and in-person meetings.
• Monitoring capabilities: Beyond recording, firms must also consider how these recordings are monitored and reviewed. Regulators will expect firms to have systems in place to detect potential breaches of market abuse regulations. Integrating eComms and trade surveillance will be key to fulfilling these expectations.
• Compliance costs: Implementing these requirements may involve additional costs, particularly for firms that do not currently record all forms of market sounding communications. However, the cost of non-compliance – both in terms of fines and reputational damage – far outweighs the investment needed to ensure robust recording practices.

How eflow can help

At eflow, we offer comprehensive eComms surveillance tools designed to help firms meet their regulatory obligations under MAR and the new ESMA guidelines. Our solutions enable firms to:

• Capture and record all relevant communications: Our tools support the recording and archiving of communications across multiple channels, including phone, video, email, and messaging platforms, ensuring that firms have a comprehensive audit trail for all market sounding interactions.
• Monitor communications for market abuse indicators: With advanced analytics and natural language processing capabilities, our solutions can identify potential market abuse indicators within recorded communications. This proactive approach helps firms detect issues early, before they escalate into regulatory breaches.
• Integrate eComms with trade surveillance: Our platform allows firms to correlate communication data with trading activity, providing a holistic view of potential market abuse. This integration is critical for meeting ESMA's expectations and demonstrating compliance to regulators.
• Ensure compliance with retention requirements: Our solutions are designed to meet the five-year retention requirement specified in the guidelines, ensuring that all recordings are stored securely and are easily accessible for regulatory reviews.

As ESMA's guidelines come into effect, firms must act quickly to update their compliance frameworks. With eflow's eComms surveillance tools, you can ensure that your firm is fully prepared to meet these new requirements, protecting both your business and the integrity of the markets in which you operate.

Reach out to us today to learn how our solutions can support your compliance journey.