Market abuse, which comprises market manipulation and insider dealing, has been a serious problem for the correct functioning of the EU financial services market for a long time. In fact, the situation was deemed so serious in the late 1990’s that a Directive on market abuse was adopted in 2003 and is still in force, though, it will be repealed from 3 July 2016 (date on which the new legal framework will apply). Even when the application date is set for July a few second level measures have already been adopted, in December 2015 and March 2016 (some published on 5 April). Market operators need to familiarise with the rules and prepare for the changes sooner rather than later.
What does market abuse mean?
Broadly speaking it covers conducts such as:
- Insider dealing: trading a financial product to one’s own advantage by using inside information (ie information only known to those working inside or close to the company in question).
- Market manipulation: manipulating the price of a financial product by spreading false supply, demand or price information.
- Unlawful disclosure of information: leaking inside information to other market participants unless the disclosure is part of the normal exercise of the profession.
Current situation (pre-July 2016)
The Market Abuse Directive 2003/6/EC (MAD), and its second level measures, introduced a framework to tackle insider dealing and market manipulation practices. The Directive increased investor confidence and market integrity by prohibiting those who possess inside information from trading in related financial instruments (ie insider trading), and by prohibiting the markets manipulation through practices such as spreading false information or rumours and conducting trades that result in abnormal prices (ie market manipulation).
The 2007 financial crisis, with all its underlying and interconnected problems, prompted a complete rethink and examination of the EU’s approach to market abuse rules. More complications arose when it became clear that MAD was also dependent upon other Directives which were being revised post crisis eg MiFID 2004/39/EC, etc.
In parallel with the revision of other financial services-related legislation a new framework was prepared for market abuse namely a new Regulation (MAR) and a Directive on criminal sanctions for infractions to market abuse rules (CS MAD). Regulation EU 596/2014 and Directive 2014/57/EU were officially published in mid 2014. The Regulation, which repeals MAD, has been partially in force since July 2014 and the CS MAD is undergoing implementation at the moment.
The CS MAD complements the MAR by requiring Member States to provide for harmonised criminal offences of insider dealing and market manipulation, and to impose maximum criminal penalties of imprisonment for the most serious market abuse offences. Member States must make sure that such behaviour, including the manipulation of benchmarks (eg LIBOR), is a criminal offence, punishable with effective sanctions.
Both MAR and CS MAD will be fully operational from 3 July 2016. Please note the CS MAD needs national implementation measures; it is in force but cannot be considered applicable until the transposition period has elapsed. Further, the CS MAD’s legal basis falls within the scope of the opt-out area for the UK, Denmark and Ireland. The UK did not opt-in unlike Ireland, hence, the Directive is not applicable to the UK (and as such it does not need to implement it).
The MAR updates and strengthens the pre-existing framework to ensure market integrity and investor protection provided by MAD. It keeps pace with market developments such as the growth of new trading platforms, over the counter (OTC) trading and new technology such as high frequency trading (HFT), strengthens the fight against market abuse across commodity and related derivative markets, explicitly bans the manipulation of benchmarks (such as LIBOR), reinforces the investigative and administrative sanctioning powers of regulators and ensures a single rulebook while reducing, where possible, the administrative burdens on SME issuers.
MAR applies to any transaction, order or behaviour (of a person or a company) concerning a financial instrument, irrespective of whether or not such transaction, order or behaviour takes place on a trading venue (governed by MiFID, MiFIR, etc) or negotiated privately in OTC transactions (governed by Regulation EU 648/2012 EMIR, as amended).
So, in order to ensure uniform market conditions between trading venues and facilities subject to MAR, any person who operates regulated markets, MTFs and OTFs is required to establish and to maintain effective arrangements, systems and procedures aimed at preventing and detecting market manipulation and abusive practices.
Some MAR provisions entered in force in July 2014 eg arts 4(4) and (5), 5(6), 6(5) and (6), 7(5), 11(9), (10) and (11), 12(5), 13(7) and (11), 16(5), third subparagraph of art 17(2), (3), (10) and (11), etc. The operational provisions relate to ESMA’s obligations to draft technical standards by 3 July 2015 and 3 July 2016 and to the Commission, that needs to issue implementing and delegated acts in specific areas. The delegation of powers to the Commission to issue delegated and implementing acts (art 35) has no expiration date so it is difficult to estimate how many of these acts will be issued in the coming years.
Member States need to comply with arts 22 (designation of single administrative competent authority), 23 (powers of the competent authority) and arts 30, 31(1), 32 and 34 (all dealing with administrative measures and sanctions) by 3 July 2016, date on which the remaining MAR provisions become applicable.
To make things a little more complicated art 39(4) states that references to Directive 2014/65/EU (MiFID II) and Regulation EU 600/2014 (MiFIR) must, before 3 January 2017, be read as references to Directive 2004/39/EC (MiFID I) in accordance with Annex IV to MiFID II in so far as the correlation table contains provisions referring to MiFID I.
Where reference in MAR is made to OTFs, SME growth markets, emission allowances or auctioned products based thereon, those provisions will not apply to OTFs, SME growth markets, emission allowances or auctioned products based thereon until 3 January 2017. This is an alignment with the application date of MiFID II and parts of MiFIR (which could be extended for another year if the EU legislature so decides – at the moment there are discussions on that).
Second level measures
As a body with highly specialised expertise it was appropriate to entrust ESMA with the elaboration of draft regulatory technical standards and draft implementing technical standards which do not involve policy choices (for submission to the Commission). As such, a technical advice request was made in late May 2014.
ESMA published its Technical advice on possible delegated acts concerning MAR on 3 February 2015 (*ref 2015/224 available here). And, in September 2015, it published its Final report on MAR’s technical standards (*ref 2015/1455).
In late January 2016 ESMA launched a public consultation (*ref 2016/162) on draft guidelines for MAR focusing on persons receiving market soundings and on legitimate interests and omissions likely to mislead the public. The consultation closed on 31 March and comments are being assessed.
Further, on 30 March, ESMA launched another consultation, this time guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under MAR. The consultation will close on 20 May 2016 (*ref 2016/444).
The EU Commission has issued, so far, a few proper second level measures namely Implementing Directive 2015/2392 and Commission Delegated Regulation EU 2016/522; both adopted on 17 December 2015. The Directive, officially published on 18 December 2015, sets out rules for the reporting to competent authorities of actual or potential infringements of MAR (whistle-blowers). Its provisions need to be implemented by all Member States (including the UK) by 3 July 2016. The Regulation, officially published on 5 April 2016, supplements MAR as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and sets out types of notifiable managers’ transactions. It will apply from 3 July 2016.
More recently, the Commission issued Commission Implementing Regulation EU 2016/523 of 10 March 2016, officially published on 5 April. The Regulation lays down implementing technical standards on the format and template for notification and public disclosure of managers’ transactions and will also become applicable on 3 July 2016.
Where to monitor developments to avoid problems
As it transpires there are a few players involved in the field and all need close monitoring to avoid difficult situations post 3 July 2016.
Compliance and legal departments in credit and investment firms and all those market operators covered by MiFID, MiFIR, EMIR, etc need to keep a close eye on developments at different levels ie EU Commission, ESMA and their national competent authorities (FCA in the UK) but mainly need to prepare for the impending changes that will become applicable on 3 July 2016 (including the measures adopted to comply with the Implementing Directive issued in December 2015).
With less than 3 months to prepare there is no time to waste and preparation needs to take over in all those entities covered by MAR.
Finally, please note that the outcome of the UK referendum on the EU membership bears no weight on compliance matters stemming from the above-mentioned market abuse new rules. Even if Brexit occurs the UK will remain part of the EU for at least 2 more years from July 2016 and that means it needs to comply with EU legislation regardless of a potential disentanglement taking place in or after 2018.