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Bovill briefing - Market Abuse Regulation
The document discusses the Market Abuse Regulation (MAR) II and the challenges in harmonizing market conduct across EU member states since the initial consultations in 2010. It outlines the broadened scope of market abuse regulations, new definitions and offenses, and emphasizes the importance of compliance, surveillance systems, and managerial responsibility in preventing market abuse. Key changes include a redefinition of 'financial instruments', expanded penalties, and heightened expectations for firms to manage information flows and assess compliance risks.
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Bovill briefing - Market Abuse Regulation
- 1. Old Problems, NewMarkets Market Abuse Regulation (MAD II) Alex Fahy and Miles Kellerman May 2016
- 2. 2 Markets and misconduct– Diversification and Proliferation
- 3. 3 Old problems • TheCommission’s has been consulting on this since 2010. • In 2010, the commission highlighted some of the problems it was finding in relation to the variation of approach across the continent; • What it amounts to is keeping new markets clean • The purposes of MAR are; o To harmonise standards across the EU o To define acceptable market conduct Authorisation 6 Member States - no possibility to withdraw an individual’s authorisation for Market abuse Management Sanction 15 Member States - no ability to disqualify/dismiss management and/or supervisory body in cases involving market manipulation Penalties 4 Member States - maximum fines of 200 000 euro or less Definition “A concept that encompasses unlawful behaviour in the financial markets and, for the purposes of this Regulation, it should be understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation”
- 4. 4 Scope - Overview •MAD II and MAR represent an expansion of the scope of market abuse regulation MAD (Current UK MAR) EU MAR Activity Behaviours (for some ‘behaviours’ orders are specifically included, for others only trades are caught) Trades, Orders & ‘Behaviours’ Securities Qualifying investments Securities, benchmarks, commodities (spot) Venue Prescribed Markets Exchanges, MTFs, OTFs and Auction Platforms
- 5. 5 Scope – Activitiesand behaviours • Key changesType of Behaviour • ‘qualifying investments’ replaced by ‘financial instruments’ (not spot) • Specifically includes cancellations and amendments • Knowledge test is now ‘knows or ought to know’ Insider Dealing • Applicable to ‘persons’ not just insiders Unlawful Disclosure • Entering into a transaction, placing a trade ‘or any other behaviour’ Manipulating Transactions • 'Entering into a transaction, placing a trade ‘or any other behaviour Manipulating Devices • ‘qualifying investments’ > ‘financial instrument, a related spot commodity contract or an auctioned product based on emission allowance’ Dissemination • No direct comparator in EU MAR – But… ‘Any other Behaviour’ Misleading Behaviour • New - ‘transmitting false or misleading information or providing false or misleading inputs… or any other behaviour ‘ Benchmark Manipulation
- 6. 6 The manipulation offences- ‘Any other behaviour’ • This new element has been explicitly included to catch misconduct relating to; o One product traded in multiple venues o An underlying financial instrument whose price or value affects a derivative • ESMA refer variously to ‘Cross-Market’, ‘Cross-Asset’ and ‘Cross- Venue. ESMAs guidance illustrates; • Cross-product o ‘The manipulation of the price of a financial instrument traded in a regulated market in order to influence the price of a CDS’ • Cross-venue o ‘False indications of interests displayed in an electronic bulletin board on a specific financial instrument that is also traded in a regulated market’ o Key Takeaway – Does your activity in one market or product have the potential to affect business in a related market or product
- 7. 7 Inside information MAD IDefinitions • Precise – typically relating to a specific event • Price Sensitive – capable of having an effect on price of a security • Non-public – not published or heavily rumoured
- 8. 8 Insider trading Criminal MarketAbuse ‘Civil’ Market Abuse Acting as a Prosecutor Acting as a Regulator
- 9. 9 Insider trading Area CurrentIncoming Knowledge Information obtained ‘which he knows, or could reasonably be expected to know, is inside information’ ‘Knows or ought to know’ Security Qualifying Investments Financial Instruments Act Dealing or attempting to deal Dealing, attempting to deal, amending or cancelling an order
- 10. 10 Insider lists –‘Over the Wall’
- 11. 11 Thematic findings –Information barriers • Employees need to understand their role in controlling information flows • Firms and senior management had identified and considered the main risks but they were not doing enough to manage them • “We expect to see business heads acting in a supervisory capacity taking responsibility for controlling flows of information, with appropriate challenge and monitoring from the second and third lines of defence” • Firms should place the assessment of circumstances that could present heightened …risks at the centre of their ongoing risk assessment
- 12. 12 Insider lists –Required Content Old New Identity of each person having inside information Job title Work direct number Reason for being on list National ID number D.o.B. Date list created/updated Deal specific v General Personal telephone no Date and Time information obtained Date list created Home address Reason
- 13. 13 Market soundings The FCAhas long been interested in regulating market soundings… Conductor of market sounding Potential investor Inside information
- 14. 14 Market soundings: Thenew requirements Conductors Obtain permission Keep records Provide documentation Recipients Evaluate information Keep records Train staff
- 15. 15 Designating a marketsounding recipient Group v. Individual: Should I assign the responsibility to an individual or an entire team? Training: Is my designated recipient(s) properly trained, and do they understand their responsibilities? Organisational Design: How do I ensure that the organisation of my firm ensures proper compliance with the market sounding regime?
- 16. 16 Managers’ transactions Persons DischargingManagerial Responsibilities (PDMRs) Manager or Senior Executive of an Issuer that: 1. Has regular access to inside information; and 2. Has managerial decision-making power Spouse Dependent Children Relatives in the Household Trusts, Companies Associated Persons
- 17. 17 Managers’ transactions: MARrequirements Threshold: €5,000 Reporting: three business days, concurrent Restrictions: 30 days prior to interim and year-end reports PDMR/Associated Person to Firm Firm to FCA Day 1 Day 2 Day 3
- 18. 18 Surveillance systems fordetection of abuse 1. Market manipulation: past and present 2. Common manipulative trading practices 3. MAR’s new requirements • Surveillance systems • Necessary capabilities • Practical considerations
- 19. 19 Market manipulation inthe past Manipulation is as old as the markets themselves… Until the 1960s, information about stocks was transmitted via ticker tape. ‘Painting the tape’ manipulated the ticker to give the appearance of activity in the market The activity elicited a response, resulting in a change of price that could be taken advantage of
- 20. 20 Manipulative trading practicesoutlawed by MAR Spoofing (one side of trade) Layering (two sides of trade)
- 21. 21 Abusive behaviour bytrading venues Market abuse can also be committed by trading venues…
- 22. 22 Systems for detectionof abuse System for detection Training Suspicious transaction and order reports
- 23. 23 Detection systems: Necessaryspecifications Analysis: each and every order and transaction inside and outside trading venues Alerts: notifies staff of potential abuse Playback: every analysis (and trade/order data) employed to investigate suspicious activity in the last five years, regardless of STOR submission
- 24. 24 Detection systems: Practicalconsiderations Will my system need to be automated? How do I set the correct parameters for my alerts? I’m a small firm—do I have the same requirements?
- 25. 25 Takeaway questions Am Isubject to MAR (II)? NoYes Relax and grab another bacon sandwich/ glass of wine… Ask yourself: • Do I need to make any changes to my system or procedures? • What areas of my business pose a compliance risk? • Are my employees properly trained and informed?