The Market Abuse Regulation (MAR) replaced the previous EU market abuse regime on 3 July 2016. This will be the first time standardised market abuse rules will apply across all EU countries. Up to now the rules flowed from a Directive which different EU states implemented in different ways (the Market Abuse Directive - MAD).
The regime is a civil law and regulatory law regime, ie sanctions under it are civil and regulatory sanctions not criminal law sanctions. It does not, for example, change the UK’s Criminal Justice Act insider dealing offences.
Some of the key aspects of MAR as distinct from MAD are as follows:
Extension of the scope of the legislation
The legislation will apply in relation to financial instruments as defined in the second Markets in Financial Instruments Directive (MIFID II) which is a widening of the sorts of instruments covered compared to MAD. It will also apply to instruments traded on a multilateral trading facility (MTF) or an organised trading facility (OTF) – not just on a 'regulated market'. In the case of the OTF concept, however, this is a concept currently found in MIFID II but not in MIFID and as MIFID II will not be implemented until 3 January 2018 MAR will only apply to instruments traded on a regulated market or an MTF from 3 July 2016 with the application to OTFs coming in when MIFID II is implemented.
MAR also carries more extensive requirements relating to commodities derivatives and their underlying commodities by applying MAR to spot commodity contracts and to types of financial instruments likely to have an effect on the price or value of a spot commodity contract. This means that unregulated commodities firms are much more at risk of coming within the scope of MAR than they did under MAD in the past – and consequently they should particularly check whether they need to introduce, or upgrade, their systems and controls for market abuse.
MAR also extends the market abuse regime to emission allowances and emission allowance market participants who similarly will have to check whether they have adequate systems and controls in place to manage this.
There are some textual changes to the definition of inside information. Notwithstanding this, however, the view the FCA appear to be taking in their recent Policy Statement on MAR implementation in the UK is that implementation is not likely to significantly change how the definition of 'inside information' is interpreted and applied by the FCA in the UK.
Under MAD, issuers were required to keep insider lists of individuals who held inside information either in relation to specific transactions or in relation to, for example, key accounting/results information in closed periods (or at other key points such as trading announcements). MAR continues this requirement but there is to be a more standardised approach to the information to be included in such lists – with an EU prescribed electronic format.
Delaying disclosure of inside information
The general policy under MAD was that publication of inside information should not be delayed but there could be delay if:
- the delay is not likely to mislead the public, and
- confidentiality of that information can be maintained.
In general terms this position continues under MAR but ESMA will publish guidelines covering a range of issues including the circumstances under which it is permissible to delay. The ESMA guidelines are likely to be published in June and are expected to take a more narrow view of the circumstances permitting delay than was typically taken when interpreting MAD up to now.
MAR will introduce new regulation around assessing possible investor interest when, for example, raising funds – whether debt or equity – where the securities are listed/traded. A person disclosing information for the purposes of market sounding must:
- assess whether there will be a disclosure of inside information
- write a note of its conclusion and the reasoning behind its decision
- inform the recipient of the consequences of possessing inside information (including the duty of confidentiality) and obtain his or her consent to being made an insider
- make a record of the information given, the identity of the recipient (entity and individual) and the date and time of the disclosure
- notify the recipient when the information provided ceases to be inside information, and
- retain the written records for a minimum of five years.
This is another area where ESMA guidelines will be published.
Buy-backs and stabilisation
The existing framework for conducting buy-back programmes of shares by an issuer and stabilisation measures without breaching the prohibitions on insider dealing, unlawful disclosure of inside information and market manipulation is also amended by MAR and will now be contained in Article 5 of MAR. There will continue to be exemptions from these prohibitions for both buy-back programmes and stabilisation.
In relation to buy-back programmes for shares, the exemption will apply where:
- the full details of the programme are disclosed prior to the start of trading
- trades are reported as being part of the buy-back programme to the competent authority of the trading venue and subsequently disclosed to the public
- the prescribed limits with regard to price and volume are complied with – ESMA in the draft RTS has indicated that an issuer should not purchase at a price higher than the highest price of the last independent trade and should not purchase more than 25% of the average daily volume of the shares traded over a period of reference, and
- it is carried out in accordance with the following objectives:
- to reduce the capital of the issuer
- to meet obligations under debt obligations exchangeable into equity securities, or
- to meet obligations under employee or management share schemes and meets the conditions to be set out in the regulatory and technical standards to be published by ESMA.
It should be noted that the exemption applies only to buy-backs of shares and ESMA has indicated that it will not extend this safe harbour to other securities.
In relation to stabilisation, the definition of stabilisation is almost identical to that which previously applied in the UK but for the purposes of section 137Q of the Financial Services and Markets Act 2000 MAR will in effect bring in new price stabilising rules. The draft ESMA RTS provides that stabilisation activity for shares will be permitted for up to 30 calendar days from the date of commencement of trading (or allotment in the case of secondary offers) and for bonds will be permitted for a period to end no later than the earlier of (i) 30 calendar days after the date on which the issuer of the instruments received the proceeds of the issue or (ii) 60 days after allotment of the securities. The stabilisation manager will have to be publicly disclosed as will the existence of any overallotment facilities.
In practical terms, documentation will need to be updated to reflect the new rules and records will need to be kept to comply with the relevant requirements in the final ESMA RTS once published but legitimate buy-back programmes and stabilisation activity will continue to benefit from a safe harbour.
Persons discharging managerial responsibilities
The obligations on persons discharging managerial responsibilities (PDMRs) and persons closely associated with them at an issuer of financial instruments is altered in a number of ways.
In particular as MAR will apply to a wider range of financial instruments traded on a wider range of platforms there will be more issuers and PDMRs caught than previously.
The disclosure obligation will apply to more types of transactions, including (i) transactions executed by a third party under an asset/portfolio mandate on behalf of PDMRs (ii) entering into contracts for differences (iii) subscriptions to a debt instrument issuance.
MAR sets out the disclosure obligations of PDMRs for transactions undertaken on their own account relating to the instruments of the issuer to which they are linked.
In the UK, for listed companies, PDMR disclosure requirements have, up to now, been set out in the Model Code. The MAR disclosure obligations are not identical to the Model Code requirements but the FCA has, rightly in our view, come to the conclusion that the Model Code is incompatible with the direct effect of the MAR PDMR requirements. Consequently the Model Code is to be withdrawn and will cease to exist after 3 July 2016. Instead the PDMR requirements will apply to all PDMRs equally and there will be no distinction, as there is at the present, between the Model Code obligations of PDMRs of listed issuers and the PDMR obligations of other issuers.