The Market Abuse Regulation (MAR), which came into force on 3 July, significantly widens the regulatory reach of national and EU authorities in relation to the commodities markets. The primary regulation is supplemented by numerous implementing regulations and guidelines in various stages of development. Three months on from implementation, now feels like an appropriate time to take stock and consider where the legislation stands.
The main changes brought about by MAR have been known to the market for some time. The extension of market abuse provisions beyond Regulated Markets, to cover products traded on Multilateral Trading Facilities, Organised Trading Facilities and also products whose price or value has an effect on these, is well understood. As are the basic rules surrounding insider dealing and market manipulation. However, whilst firms have had a couple of years to digest the primary legislation, the same cannot be said of the various implementing and regulatory technical standards and guidelines which have been produced subsequently.
The impact of Brexit
Before considering any substantive developments, one cannot ignore the impact of the UK’s vote to leave the EU. Immediately after the vote, the Financial Conduct Authority (FCA) was at pains to emphasise that MAR remains in force in the UK and that firms will need to continue to comply with its provisions until they are amended by government or parliament. In the long term, the regulatory landscape will depend on the relationship that the UK negotiates with the EU. Whatever is agreed, it seems unlikely that amending such a complicated package of financial regulations will be prioritised by any post-Brexit government. Therefore despite the Brexit decision, it seems likely that the provisions of MAR will continue to apply in the UK for a number of years.
More immediately, the area where Brexit has had a clearer impact is on the level of British influence in EU decision making bodies. The UK, with its large financial sector, was an influential and often restraining voice during the development of MAR. In the wake of the Brexit decision much of this influence has been lost, which could have an adverse impact on official guidance and Q&As still being drafted by The European Securities and Markets Authority (ESMA).
MAR’s impact on commodity markets
What is inside information?
One of the most significant changes brought about by MAR is the extension of the scope of inside information to cover not just derivatives but also the related spot markets which have an impact on them. In March, ESMA produced a Consultation Paper (CP) outlining examples of the type of information it would consider inside information in relation to commodities, including:
• Official communications issued by conferences of oil producing countries when relating to decisions on production levels
• Information about the production, imports, exports and stocks of agricultural commodities on which a commodity derivative is based
• Information about the stocks or stock movements of metal commodities in warehouses and storage facilities published in accordance with the rules or practices of a spot commodity market
ESMA received feedback from a number of industry groups, many of whom felt the guidelines had been too widely drafted, lacked clarity and an understanding of the markets. For example, a number of respondents felt that weather, which is given as an example of the type of information ESMA would expect to be disclosed in relation to freight rates, is publically known and that therefore its inclusion in the CP was inappropriate. At the time of going to press, the final version of the guidelines has not yet been published but is expected imminently.
Procedures for the detection of market abuse
MAR requires firms and persons professionally arranging or executing transactions to establish and maintain effective procedures aimed at preventing and detecting market abuse which will capture proprietary commodity traders. In order to foster a uniform approach across Member States, the EU adopted a Delegated Regulation outlining the level of detail it expects to see from these procedures.
The Delegated Regulation states that firms must have the capacity to analyse each and every transaction and order placed, modified, cancelled or rejected, individually and comparatively.
In some cases, depending on the scale of the business, this level of granularity will require firms to employ an automatic surveillance system. However an element of human participation in the analysis of suspicious transactions must also be retained and firms must provide comprehensive training to all staff involved in the processing of transactions.
The Delegated Regulation allows for the outsourcing of some of this surveillance function but firms will remain fully responsible for complying with their obligation to detect and prevent market abuse under MAR. Such comprehensive internal systems may require significant investment for some firms.
The UK’s enforcement approach
MAR will be enforced in the UK through the Financial Services and Markets Act (FSMA), which has been amended accordingly. The most significant change is the deletion of the “reasonableness defence”.
FSMA previously contained provisions allowing a person who reasonably believed that his actions did not amount to market abuse or who took all reasonable steps to avoid engaging in market abuse, to use this as a defence to avoid sanction. These provisions have now been deleted. However, the FCA has acknowledged that it will take a “proportionate approach when deciding whether to take enforcement action…by taking into account the full circumstances of each case…including matters pertaining to the nature, seriousness and impact of a suspected contravention”.
This rounded approach may provide some comfort to firms who are dealing with significantly greater oversight than before but it remains to be seen where the regulators will draw the line in practice.