Insider trading: the new market abuse regime

19 July 2016

While the current focus of the financial services community could be said to be on the implications of the EU referendum outcome, there is an element of “business as usual” as a key piece of EU financial services legislation, the Market Abuse Regulation (Regulation 596/2014) (MAR), now applies in all Member States as of 3 July 2016.  

What is covered by the new regime?

The Regulation sets out a new regime for tackling “unlawful behaviour” in financial markets and covers insider dealing, market manipulation and the improper disclosure of insider information. This updates the civil market abuse framework established by the Market Abuse Directive (MAD). 

Are there new national provisions?

As a Regulation it does not need to be transposed in detail in the national legislation of each Member State (it has direct effect), though the Financial Services and Markets Act 2000 (FSMA) (Market Abuse Regulations) 2016 contain provisions to ensure UK compatibility with the Regulation. The Regulation repeals s118 of FSMA 2000 in its entirety.

The Financial Conduct Authority (FCA) has made changes to its Handbook, including the Code of Market Conduct, to ensure that its rules are compatible with the new regime.  A Policy Statement on “Changes to the Decision Procedure and Penalties manual and the Enforcement Guide for the implementation of the Market Abuse Regulation” (PS 16/18) was published on 30 June 2016 and includes the Enforcement (Market Abuse Regulation) Instrument 2016.

The FCA is firmly behind the new regime, stating in its recent Annual Report for 2015/6 that “We have been working closely with industry to prepare for the significant challenges brought by the new regulation and to ensure readiness for a new regime which will bring real benefits and robustness to UK secondary markets.”

Useful sources

The European Securities and Market Authority has published Q&A on the Market Abuse Regulation. This includes a full list of the technical measures that have been adopted to ensure detailed implementation.

The FCA has a useful information page on the Market Abuse Regulation which covers the topics below.

What does the regime cover?

In its Policy Statement, the FCA states that the regime will apply to:
o Financial instruments admitted to trading on a regulated market or for which a request for admission to trading on a regulated market has been made;
o Financial instruments traded on a multilateral trading facility (MTF), admitted to trading on an MTF, or for which a request for admission to trading on an MTF has been made;
o Financial instruments traded on an organised trading facility (OTF); and
o Financial instruments not covered by point (a), (b) or (c), the price or value of which depends on or has an effect on the price or value of a financial instrument referred to in those points, including, but not limited to, credit default swaps and contracts for difference.

Is there an extension in scope?

Yes, the extension to financial instruments traded on multi-lateral and organised trading facilities is an extension of scope.  MAR also applies to emission allowances and emission allowance market participants (EAMPs) benchmarks, and spot commodities are in scope in certain situations.

There is now an extra-territorial reach with the market abuse regime extended to cover behaviour within and outside the EU.

How are financial instruments defined?

This is set out under so-called “MiFID I”  the Market in Financial Instruments
Directive. This will be updated by MiFID II to from January 2018.

How is “Inside Information” now defined?

The definition of ‘inside information’ (Article 7 MAR) is broadly unchanged from the previous definition, but has been widened to capture inside information for spot commodity contracts. The obligation to disclose inside information has been extended to some EAMPs. (See above)

Issuers and EAMPs must notify the regulator after delaying disclosure of inside information, and financial institutions must seek consent from the regulator prior to delaying disclosure due to financial stability concerns.

Are there any changes re “Insider Dealing” or “Unlawful Disclosure”?

Under the new regime, it is clarified that the use of inside information to amend or cancel an order shall be considered to be insider dealing. It is also clarified that recommending or inducing another person to transact on the basis of inside information amounts to unlawful disclosure of inside information.

MAR does introduce a framework for persons to make legitimate disclosures of inside information in the course of market soundings.  ESMA published a report on Final Guidelines relating to market soundings and delay in disclosure was issued on 13 July.

MAR also seeks to tackle “attempted market manipulation” in cases where someone tries to manipulate the market without actually trading. 
MAR places an obligation on issuers and EAMPs to draw-up and maintain a list of all those persons working for them that have access to inside information.
Are there changes to reporting suspicious transaction?

Yes. MAR extends the existing obligation to report suspicious transaction reports, to include suspicious orders too.

The FCA confirms that trading venues are also caught by the obligation to submit STORs, as well as buy-side firms and proprietary traders.
What about whistleblowing?

MAR places requirements on regulators and firms to be able to receive whistleblowing notifications. These must include:

(a) specific procedures for the receipt and follow-up of infringement reports, including the establishment of secure communication channels for such reports;
(b) appropriate protection in the workplace for whistleblowers reporting breaches or accused of breaches;
(c) measures to protect the identity of the reporting and reported persons. N.B. If national law means that confidentiality cannot be protected, the competent authority must inform the person about this.
Managers’ transactions

With the FCA’s continued focus on good governance and culture of responsibility, persons discharging managerial responsibilities within issuers (PDMRs), and persons closely associated with them, must notify the issuer and the regulator of relevant personal transactions they undertake in the issuer’s financial instruments. The issuer in turn must make that information public within three business days.

Have new criminal sanctions been introduced?

The Regulation seeks to bring a unified approach to this area, which could result in an increase in detection and regulatory or criminal investigations and proceedings throughout the EU. It was accompanied by a Directive on Criminal Sanctions for Market Abuse (2014/57/EU). However, the UK chose not to opt-in to this Directive and is not bound by its provisions. The UK’s criminal regime for market abuse – as contained within the Criminal Justice Act 1993, the Financial Services and Markets Act 2000 and the Financial Services Act 2012 – remains unaltered. 

Nevertheless, UK firms operating in the UK across EU Member States’ borders should be aware of the provisions since they could incur criminal liability in those jurisdictions subject to Criminal Sanctions Directive including, for instance, in respect of trading carried out in London on a European exchange.  

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