Regulatory Bulletin: Market Abuse Directive II

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The Market Abuse Regulation (MAR) and the Directive on Criminal Sanctions for Market Abuse (CSMAD) make up the legislation known as the Market Abuse Directive (MAD) II.

MAD II was introduced on 2nd July 2014 and took effect across the EU, including the UK, on the 3rd July 2016 to replace the original Market Abuse Directive (MAD). MAD II covers new markets and instruments since the original MAD was first introduced in 2003.

The UK government has currently opted out of the CSMAD, which allows criminal sanctions for market abuse across the EU to be uniform for the first time.


What does the Market Abuse Regulation (MAR) state?

  • The scope of the MAR now applies to any financial instrument:
  1. which is traded on a regulated market, or a request for admission to trade has been made
  1. which is traded on a Multilateral Trading Facility (MTF), admitted to trade on an MTF or a request for admission to trade has been made
  1. which is traded on an Organised Trading Facility (OTF).

If a financial instrument is not described by any of the above, but depends on or has an effect on the value of a financial instrument described above, then it also falls under the scope of the MAR.

Whether a transaction, order or behaviour concerning a financial instrument described above takes place or not, it is still subject to the MAR under the new requirements. For example, gaining an unfair advantage over the supply or demand of a financial instrument.

The definitions of a financial instrument, MTF and OTF are currently in the Markets in Financial Instruments Directive (MiFID) I.

  • The requirements of the MAR are:
  1. Inside Information and Disclosure

The definition of inside information is, information which has not been made public, but is precise and relates to a financial instrument, that if it were to be made public, it would significantly effect the value of that financial instrument. The definition has been extended to include spot commodity contracts.

Under the MAR, some Emission Allowance Market Participants (EAMPs) must disclose inside information. When delaying the disclosure of inside information, Issuers and EAMPs must notify the FCA after doing so, while financial institutions must seek permission from the FCA before delaying, because of the possibility of financial instability.

Information is described as ‘precise nature’, when a person can make an assumption of the value of a relevant financial instrument using this information.

Information is described as ‘price-sensitive’, when a person can use this information to make an investment decision as it has a big effect on price.

  1. Insider Dealing and Unlawful Disclosure

The use of inside information to change or cancel a transaction is considered to be insider dealing.

The use of inside information to recommend or induce another person to carry out a transaction is the unlawful disclosure of inside information.

  1. Market Manipulation

The MAR states attempted transactions, as well as completed transactions, now fall within the scope of the manipulation offence. Giving false or misleading signals, to secure or likely to secure financial instruments at an abnormal value, all fall into the manipulation offence under the MAR.

This is because these manipulation techniques can have a significant effect on the value of financial instruments therefore giving an unfair advantage, not in accordance with the Accepted Market Practices (AMPs).

  1. Market Soundings

Market soundings are defined as the communication of information before the official announcement of transaction has been made, therefore gaining the thoughts of investors involved in the transaction.

Under the MAR, a system has been brought in place to make people officially disclose any inside information they have, if they are required to pass on this information as part of their role at a firm.

The system involves assigning a person who makes market soundings a Disclosing Market Participant (DMP), and assigning a person who receives them a Market Soundings Receiver (MSR). It is the communication between these two individuals that is regulated under the MAR.

The DMP must perform assessments to determine whether the information they provide is inside information and similarly, the MSR must perform assessments to determine whether the information they receive is inside information.

  1. Buy-Back Programmes and Stabilisation Measures

The current MAD states there is a safe harbour, so buy-back programme of shares (not derivatives) does not become market abuse. A safe harbour is a provision that protects management from liability for making financial forecasts or predictions. The safe harbour states the transactions can only be carried out on a trading venue and conditions such as timing, price and volume of trades must be disclosed and reported.

  1. Insider lists

Issuers and EAMPs are obliged to make and maintain a list of all people who have access to inside information, if they work under or for them.

  1. Suspicious Transactions and Order Reports (STORs)

The MAR now states if there are any suspicious transactions, as well as any suspicious orders, a Suspicious Transaction or Suspicious Order Report (STOR) must be submitted. Financial institutions such as trading venues, buy-side firms and proprietary traders are now also obliged to submit STORs.

  1. Manager’s Transactions

Managers, Persons Discharging Managerial Responsibilities within issuers (PDMRs) and people closely associated with them, must notify the FCA and issuer of any personal transactions undertaken in any financial instrument issued by the firm.

  1. Investment Recommendations

People who produce or give investment recommendations must do so in an objective manner, whilst also declaring any conflicts of interest that may have arisen.

  1. Whistleblowing

Firms, in accordance with the FCA and MAR, must have a procedure in place to allow any notifications about whistleblowing to be received by the compliance officer or department of the firm, who can then notify the FCA if necessary.


What actions need to be taken to comply with the Market Abuse Regulation (MAR)?

  1. Staff Awareness and Training

With the new additions to the MAR, firms must ensure staff are made aware of all the changes that are now in place and must understand any new requirements of their roles. For example, some of the key changes all staff should be made aware of include:

  • the extended definition of inside information and insider dealing
  • the changes to the requirement of disclosure
  • how cancelled transactions fall under insider dealing and attempted transactions fall under market manipulation.

In some cases, firms must ensure staff are re-trained in accordance with the new MAR to be fully compliant. The person who is assigned the role of DMP will most likely need re-training because the requirement for how they communicate with other firms regarding market soundings has significantly changed. Also, the person who is assigned the new role of MSR in the firm must undergo training.

  1. Disclosure of Inside Information

If the disclosure of inside information has to be delayed, it is paramount the FCA are notified. Depending on the type of firm, it is also important when to notify the FCA. Specifically, Issuers and EAMPs can notify the FCA after delaying the disclosure of information whereas, financial institutions must ask permission from the FCA to delay the disclosure of information. Therefore, an adequate and robust procedure must be in place to contact the FCA if disclosure is delayed.

  1. Insider Lists

Issuers and EAMPs must maintain a list of all individuals who have access to inside information. It is important to note in the list why the individual has access and the date and time the individual has access and other personal details such as name, address, date of birth and national insurance number. It is also important that this list is maintained and updated frequently.

  1. STORs

Firms’ compliance departments and compliance officers must be aware of the requirement to report any suspicious transactions, orders or reports in the form of a STOR. If monitoring or detecting of suspicions within the firm is electronically performed, then an updated and robust version of the software may be required to cover all transactions, orders and reports at the firm.

  1. Manager’s Transactions

If a manager or PDMR of a financial instrument carries out a personal transaction in the same financial instrument issued by the firm, an effective procedure must be in place to notify the FCA and the issuer of this transaction.