In 2016, the European Securities and Markets Authority (ESMA) implemented a new legislative framework intended to prevent market abuse in European financial markets. This legislative regulatory framework is entitled the Market Abuse Regulation – MAR. The following FAQ will help you to better understand the EU’s most recent market abuse regulations and help you to ensure that your firm is fully compliant.
MAR – the Market Abuse Regulation – is a legislative framework intended to protect against all forms of market abuse in European markets. Published on 16 April 2014 by the European Securities and Markets Authority (ESMA), this legislation is intended to ‘guarantee the integrity of European financial markets and increase investor confidence’. It came fully into force on 12 June 2016, fully repealing and replacing the earlier Market Abuse Directive (MAD) implemented by ESMA in 2003.
The regulations outlined by MAR are varied and manifold. As such, you should refer to the regulation itself for a comprehensive overview of the various pieces of legislation put forward therein. In brief, however, MAR prohibits ‘insider dealing, unlawful disclosure of inside information and market manipulation’, and outlines ‘provisions to prevent and detect these’. These terms will be explained in more detail below.
Broadly speaking, the rationale behind prohibiting certain actions under MAR is to reinforce the integrity of European markets, protect investors, and improve market transparency. As such, it is closely linked to the ethos of MiFID II – another key piece of European legislation implemented 19 months after MAR. For more on MiFID II, see eflow’s MiFID II FAQs.
MAR is a European legislative framework and, as such, is predominantly aimed at European markets. However, its influence also extends to third-country, non European firms who pursue business within the EU.
There are, however, some exceptions. ESMA’s regulations on the prohibition of insider dealing and market manipulation do not apply to trading in own shares in buy-back programs or trading in securities for the stabilization of securities when some conditions laid down in MAR are met. As well as this, MAR does not apply to public authorities in pursuit of monetary, exchange rate or public debt management policy. Some institutions within the framework of the EU’s climate policy and the EU’s Agricultural Policy are also exempt.
MAR increases the scope of of the original MAD legislation, extending its market abuse framework to cover new markets and platforms that have arisen since MAD was first implemented.
While MAD only covered financial instruments that were admitted to trading on EU regulated markets, under MAR, the definition of what constitutes a financial instrument has been widened. Under MAR, any instrument traded on an EU regulated market, on a multilateral trading facility (MTF), or on an Organised Trading Facility (OTF) is subject to the regulations outlined therein.
This increase in scope closely parallels the new market structure brought about by MiFID II. For a brief overview how MiFID II has restructured the market, see eflow’s MiFID II FAQs, or visit ESMA’s website for a more comprehensive overview of the MiFID II legislative framework.
This term is somewhat broad, and depending on the sector in question, it may be defined differently. Generally speaking, any up-to-date information which an issuer believes will have a significant effect on the price of a financial instrument should be considered as insider information.
Article 7 of MAR defines inside information, inter alia, as ‘information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were 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’.
Such information may include, but is not limited to, the following:
1. Facts related to the company’s business strategy, such as the purchase or sale of key shareholdings or some form of merger.
2. Facts related to the financial position of the company, such as end of period financial results, fines incurred, or any deviations from previous forecasts.
3. Facts related to capital, control or governance, such as changes in the executive board of an issuer.
Aside from some specific exceptions outlined in Article 17 of MAR, all insider information that directly concerns the issuer must be disclosed to the public as soon as possible. Such disclosures must be made in the form of a press release. This press release must be made to as wide a section of the public as possible with no discrimination. It must also be made available free of charge, and it must be made simultaneously available across the EU.
If insider information is withheld or falsified, this may be considered as market manipulation. In these instances, severe penalties and a prison sentence may be incurred.
If insider information is disclosed in anything other than a purely professional context, this constitutes unlawful disclosure of insider information.
Insider dealing occurs in instances where an entity who possesses insider information acquires or disposes of instruments to which that information relates, while simultaneously withholding that information from the general public. Again, this will likely incur fines or a prison sentence.
Again, this term is fairly broad; any number of different individual actions may constitute some form of market manipulation. For a comprehensive overview of what ESMA considers as market manipulation, see Article 12 of MAR.
The following, paraphrased from MAR Article 12, are some examples of actions which may be considered as market manipulation:
1. Entering into a transaction which is likely to give misleading signals about the price of, supply of, or demand for a financial instrument
2. Entering into a transaction which is likely to affect the price of one or several financial instruments, which employs a fictitious device or any other form of deception or contrivance
3. Disseminating information which is likely to give false or misleading signals about the price of, supply of, or demand for a financial instrument
4. Transmitting false or misleading information, or providing false or misleading inputs in relation to a benchmark where the person who made the transaction or provided the input knew or ought to have known that it was false or misleading
5. Any behaviour which manipulates the calculation of a benchmark
6. A person acting in collaboration to secure a dominant position over the supply of or demand for a financial instrument which is likely to create unfair trading conditions
7. The buying or selling of financial instruments at the opening or closing of the market which has or is likely to have the effect of misleading investors on the basis of the prices displayed. These acts are called Marking the Open and Marking the Close respectively
8. The placing of orders to a trading venue which disrupts or delays the trading system of the trading venue
An accepted market practice (AMP) is a particular behaviour or action which is designated as being acceptable by a national competent authority (NCA). While AMPs are decided specifically by NCAs, MAR does outline a number of factors that competent authorities must take into consideration before deciding whether or not a specific market practice is regarded as an AMP. These factors are laid out in Article 13 of MAR.
When establishing an AMP, an NCA must take the following criteria into consideration:
1. Whether the market practice provides a substantial level of transparency to the market
2. Whether the market practice ensures a high degree of safeguards to the operation of market forces and the proper interplay of the forces of supply and demand
3. Whether the market practice has a positive impact on market liquidity and efficiency
4. Whether the market practice takes into account the trading mechanism of the relevant market and allows market participants to react properly to the new market situation created by that practice
5. Whether the market practice creates risks for the integrity of markets
6. The outcome of any investigation of the relevant market practice by any competent authority
7. The structural characteristics of the relevant market
The competent authority must in particular consult appropriate relevant bodies such as representatives of issuers, financial services providers, consumers, other authorities, market operators and ESMA, before officially accepting an AMP.
Owing to the fact that, ultimately, NCAs are responsible for establishing AMPs, it is possible that different European countries have different standpoints on particular market practices. A recent example of this is the French Autorité des Marchés Financiers’ AMP on Liquidity Contracts. In instances such as these, ESMA is able to publish negative opinions in a bid to override these AMPs.
While MAR is a European piece of legislation drawn up by ESMA, it falls on each country’s national competent authority (NCA) to enforce.
MAR places a significant amount of emphasis on the necessity of various NCAs communicating with one another to ensure that there is coherence throughout the EU with regards to market abuse legislation. As stated on ESMA’s website, MAR requires ‘closer cooperation and a higher degree of exchange of information between national authorities, thus ensuring the same framework for enforcement throughout the EU and reducing potential inconsistencies, confusion and loopholes.’
MAR outlines a number of supervisory and investigatory powers which should be vested into national competent authorities to ensure its adequate enforcement. These include, among others:
1. The access to any document or data and the right to receive or take a copy thereof
2. The right to carry out on-site inspections or to require recordings or data traffic held by investment firms, credit institutions or financial institutions and, insofar permitted by national law, by telecommunications operators
3. The power to impose a temporary prohibition of the exercise of professional activity
Directive 2014/57/EU on criminal sanctions for market abuse (CS MAD) works in parallel with MAR. It requires that all European Member States ‘provide for harmonised criminal offences of insider dealing and market manipulation.’ It also states that prison sentences be imposed of at least two to four years, depending on the severity of the offence committed.