The European Securities and Markets Authority (ESMA) and some national competent authorities (NCAs) have observed “high-volatility episodes” in EU equities shortly after pre-close calls. Pre-close calls are the final opportunity for firms to provide analysts with a clear understanding of recent performance ahead of quarterly or half-year earnings releases, when listed companies must avoid communicating with market participants to prevent selective information disclosure. These “quiet periods” typically last between two to four weeks, depending on company policy, regulatory requirements, and market practices.
During these calls, only public non-material information should be shared.
If the only information provided is public and non-material, it should not impact share price. However, ESMA’s recent observations suggest that, in some cases, material or market-sensitive information may be shared or inferred by participants, whether through pre-close calls or coincidentally around the same time.
ESMA has clarified that it is up to individual NCAs to pursue any supervisory actions. However, in the short term, ESMA issued a statement to issuers about the legislative framework governing pre-close calls and highlighted good practices to minimise risks.
Inside Information: The Rules
ESMA started by reiterating that pre-close calls are subject to public disclosure of inside information rules set out in Article 17 of the Market Abuse Regulation (MAR). Key points:
Issuers must disclose inside information that directly concerns them as soon as possible. The information should be made available to the public in a timely, complete, and accurate manner, and be maintained on the issuer’s website for at least five years.
Emission allowance market participants must publicly disclose relevant inside information, including the capacity and utilisation of installations.
Disclosure of inside information can be delayed if immediate disclosure may harm the issuer’s legitimate interests, if the delay is not likely to mislead the public, and confidentiality is maintained.
Financial institutions may delay the disclosure of inside information to preserve financial stability, provided that confidentiality is ensured, it serves the public interest, and approval is obtained from the relevant authority.
If the confidentiality of delayed inside information is compromised, it must be disclosed immediately.
When inside information is disclosed to third parties in the ordinary course of duties, it must be made public simultaneously or promptly.
ESMA’s guidance for pre-close calls
ESMA also highlights some “good practices” that have been observed across issuers to mitigate risks, including:
Conducting a thorough assessment of the information to be disclosed during pre-close calls ** ** to ensure that no insider information is inadvertently shared.
Announcing pre-close calls well in advance, with details such as the date, location (if applicable), topics to be discussed, and intended participants.
Making materials used in pre-closed calls publicly available on the issuer’s website, including slides, notes and other materials that may be used during pre-close calls to ensure equal access to the same insights and data.
Recording pre-close calls and making the records available to NCAs, creating an official audit-trail of what was discussed. Some issuers even made these recordings publicly available.
These practices aim to prevent the disclosure of non-public information, mitigate any unfair advantage if such information is shared, and promote transparency for all stakeholders. The goal is to not only adhere to compliance standards but also actively uphold market integrity.
Following the thread of regulation: what’s next?
We have closely followed the actions of regulators to understand their thinking and interpret their process and predict what’s next. This latest statement fits the trend: increasingly targeted, deeper scrutiny of market abuse factors. See some of the key regulatory milestones below:
Monitoring: regulators realised that off-channel communications are difficult to monitor and therefore insider trading and other abuses are difficult to detect. They issued record fines for Whatsapp conversations involving market participants.
Recordkeeping: once communications are brought on-channel, firms need robust systems and controls to maintain records of such conversations such that they can be analysed and audited.
Detection: Regulators are increasingly starting to demand that firms connect the dots, with all business communications conducted on monitored channels., This, together with systems to store the data, should allow firms to have everything they need to detect and prevent market abuse.
In their latest statement on pre-close calls, ESMA identifies a period of concentrated communication, analyses coinciding market activity and identifies a suspicious trend. Importantly, ESMA suggests ways that firms can monitor and manage these risks themselves. ESMA, like other regulators, is pushing for detection and they are doing so with the use of multiple types of data:
Communications data: The communications surrounding pre-close calls were identified as a source of risk.
Market data: Price volatility around the time of pre-close calls were identified as a reason for suspicion.
Trade execution records: Ultimately, it is each firm’s trading records which will complete the picture and identify possible bad actors.
If ESMA can connect these dots, then firms can too, and must, if they wish to identify market abuse and avoid regulatory penalties. ESMA and other regulators are now converging on the need for integrated surveillance.
Detecting insider trading with integrated surveillance
Effective surveillance requires a holistic approach. This includes integrating data from multiple, disparate, data sources to create a complete view of trading activity and communication patterns, putting it into context by overlaying broader market movements. It also requires advanced algorithms to analyse these vastly different data types as one at scale, with timing and other contextual information considered. Only then can firms ensure that insider trading is detected and addressed, upholding market integrity and remaining narrowly ahead of the regulatory curve. For a full breakdown on integrated surveillance, download our free eBook.
This may seem like a high bar. But insider dealing isn’t overt—bad actors will do whatever they can to mask their behaviour, so firms must be able to make use of all the information available to them. Anything less leaves stones unturned, opening the firm to regulatory and reputational hits.
eflow has closely monitored trends in market abuse and its regulation since 2004. And we have been building an off-the-shelf integrated surveillance platform ever since. To quickly bring your firm up to speed with the latest solutions in market abuse, trade and eComms surveillance, get in touch.
