The market abuse regulation: are we nearly there yet?
January 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
The Market Abuse Regulation (MAR), together with the Directive on Criminal Sanctions for Market Abuse (CSMAD), form a package of legislative proposals known as ‘MAD II’ which was published in the Official Journal of the European Union (EU) on 12 June 2014 and entered into force across the EU on 2 July 2014. MAD II replaces the original Market Abuse Directive (MAD) and widens its scope to include new markets and instruments that have developed since MAD came in. It also captures new market developments and practices such as high frequency and algorithmic trading and emission allowances trading. In addition, CSMAD will introduce uniform criminal sanctions for market abuse for the first time in the EU. However, the UK government has announced that it will not be opting in to CSMAD currently, and so this article does not look at CSMAD in detail.
While both MAR and CSMAD entered into force on 2 July 2014, they will not become law in member states until July 2016. In the interim, the European Securities and Markets Authority (ESMA) must develop the detailed, technical measures and advice to the European Commission required for the delegated legislation and implementing acts and, accordingly, it issued two consultation papers in July 2014.
Scope of MAR
The scope of MAR is much wider than that of MAD. Some of the key changes in scope are as follows:
Financial instruments and trading facilities. MAR not only covers financial instruments traded on a regulated market, it will also apply to any financial instrument which is traded, or admitted for trading, on a multi-lateral trading facility (MTF) or on an organised trading facility (OTF). MAR will also affect financial instruments which are traded over-the-counter (OTC) and which will have an effect on the price or value of financial instruments subject to MAR and those traded pursuant to the EU Regulation on emissions allowances. The definitions of MTF and OTF come straight from MiFID II and it is these definitions which widen the scope of MAR to include such financial instruments. One of the problems with MAR, however, is that it could prove difficult for firms to determine precisely whether a financial instrument is subject to MAR requirements.
Benchmarks. The market manipulation provisions bring ‘behaviour in relation to benchmarks’ within scope. These were inserted into MAR following the scandal surrounding the rigging of the London Inter-Bank Offer Rate (LIBOR) in 2012.
Extra-territoriality. The wording of MAR means that the only requirement for it to apply would be that the financial instrument in question is admitted to trading on a European trading venue, or for the financial instrument to depend upon or affect the value or a financial instrument so admitted. None of the parties involved would need to have any connection to the EU. This will have consequences for any persons that deal in financial instruments which might either be traded in Europe, or could affect the value of an instrument so traded.
Inside information, insider dealing and improper disclosure
MAR contains prohibitions on insider dealing and the improper disclosure of inside information, both of which draw on the defined term, ‘inside information’, which was also used under MAD.
The key elements of the definition remain largely unchanged in MAR, but there are some important differences:
Inside information. Under Article 7 of MAR, inside information is defined as information which has not been made public, is precise, and relates to one or more issuers of financial instruments or to one or more financial instruments that, were it to be made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. The definition also includes commodity derivatives, spot commodity contracts and emission allowances.
Information will be of a ‘precise nature’ where it contains a set of circumstances which either exist or may be reasonably expected to and which are specific enough to enable a person to draw a conclusion as to the possible effect of that set of circumstances, or event, on the price of the relevant financial instrument or commodity contract. The circumstances will also include taking an ‘intermediate step’ in a protracted process, which include such matters as the state of contractual negotiations.
Information which would have a ‘significant effect’ on price is often referred to as ‘price-sensitive information’ and is defined in MAR as information which a reasonable investor would be likely to use as the basis of an investment decision. This use of the ‘reasonable investor test’ expands the definition.
Insider dealing. The definition of insider dealing under MAR is very similar to that provided in MAD. A person commits insider dealing where he possesses inside information and uses for disposing of, either for his own account or that of a third party, directly or indirectly, financial instruments relating to the information he possesses.
MAR widens the definition of insider dealing in two particular instances. The first is using inside information to cancel or amend existing orders placed before the person possessed inside information, on the basis of the new inside information. In addition, ‘attempting’ to engage in insider dealing will also be caught, as will attempting or inducing another person to enter into insider dealing.
Improper disclosure. A person commits the offence of improper disclosure where he possesses inside information and discloses it to others, except where such disclosure is in the normal course of his employment, profession or duties.
The definition of market manipulation is similar to that in MAD: where a person enters into a transaction, or places an order to trade, or carries on any other behaviour which: (i) gives or is likely to give false or misleading signals as to the supply of, or demand for, or price of a financial instrument; or (ii) secures or is likely to secure the price of one or several financial instruments at an abnormal or artificial level. Such behaviour is prohibited, unless it can be established that actions had been carried out for legitimate reasons and conforms to accepted market practices.
MAR also stipulates that the use of ‘fictitious devices’ or other forms of ‘deception or contrivance’ are prohibited (as they were under MAD).
ESMA’s consultations closed on 15 October 2014 and its technical standards are due to be published in March 2015. These are then expected to be incorporated into implementing legislation by December 2015 and published in the Official Journal of the EU in June 2016. MAR will become law across the EU in July 2016. As stated, the UK has at present not opted into CSMAD, but the government has indicated that it may decide to opt in to the Directive in future, following further negotiation. Should the UK government decide to opt in, it would need to review and amend the current criminal law position on market abuse in the UK to bring it into line with the CSMAD provisions.
Charlotte Hill is a partner at Covington & Burling LLP. She can be contacted on +44 (0)20 7067 2190 or by email: firstname.lastname@example.org.
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