On July 3, the market abuse reform will be applicable, which introduces important changes for Spanish market players.
In practice, it is advisable for listed companies to review their internal operating procedures and protocols from the perspective of market operations and corporate compliance. Many of them will have to adapt, among others, their internal codes of conduct.
In the case of entities that render financial advisory services, for example, we highlight the new obligations to detect and report suspicious orders and transactions, and the new regulation on market soundings.
Common framework in the EU from July 3, 2016.
MIFID 2/ MIFIR “Quick Fix”. Delay in the application of some provisions until January 3, 2018.
Broadening of the scope of application of the legislation to new trading platforms, instru- ments and behaviors.
Market soundings. Regulation of legitimate disclosure of inside information in the course of market soundings.
Delay in disclosing inside information. New system for ex post supervision.
Market manipulation. The definition is broade- ned to prohibit attempts at manipulating and to encompass new behaviors.
Suspicious transactions. The reporting obligations of financial intermediaries are broadened and a single electronic notification template (Suspicious Transaction and Order Report, or “STOR”) is established.
Director and executive transactions. Rele- vant changes are introduced in the system for reporting these transactions.
“Blackouts.” For the first time in our market, the prohibition against trading before the publi- cation of financial information is regulated.
“Whistleblowing.” Efficient measures must be established to allow the reporting of violations to the competent authorities.
The reform replaces the Market Abuse Directive (2003/6/EC) (“MAD”) and its implementing provisions with:
- Regulation (EU) No. 596/2014, on market abuse (“MAR”), which is directly applicable in all Member States. It seeks to establish a common framework on market abuse in the EU and prevent the differences detected to date among Member States as a result of the incorporation of MAD.
In Spain, the MAR regulation will replace the current provisions of articles 225 et seq. of the Securities Market Act, Royal Decree 1333/2005 and their implementing provisions.
- Directive 2014/57/EU on criminal sanctions for market abuse, whose transposition deadline is July 3, 2016, and that is still pending in Spain.
Because of the delay in application of MIFID 2 and MIFIR approved on June 7 (MIFID 2/ MIFIR “Quick Fix”) and mainly driven by the absence of the necessary data collection infrastructures, (i) some issues introduced by MIFID 2 to which the MAR refers (e.g., the organized trading facilities and some provisions referred to SME growth markets) and (ii) several reporting obligations of the competent authorities of the trading venues envisaged in the MAR will not be applicable until January 3, 2018.
Below is a summary of the key features of the reform.
The MAD focused mainly on financial instruments admitted to trading on a regulated market. MAR will now be applicable:
- On all trading platforms: regulated markets, multilateral trading facilities (“MTFs") and organized trading facilities (“OTFs”).
- To financial instruments traded only over the counter (OTC) whose price or value depends on a security traded on a regulated market, MTF or OTF.
In Spain (ex. article 322.3 of the Securities Markets Act), the majority of the market abuse provisions are already applicable to trading on MTFs (e.g., on MAB [Alternative Stock Market] and on MARF [Alternative Fixed Income Market]). Therefore, in practice, the impact on the market of the expanded scope of application will be somewhat less than in other Member States. Furthermore, as a result of MIFID 2/MIFIR Quick Fix, the introduction of the OTF as a new type of trading platform is delayed until January 3, 2018.
In general, the current definition of "inside information" is maintained. The concept of “insider dealing" is clarified to include not only transactions for the acquisition or disposal of financial instruments about which inside information is available, but also transactions for the cancellation or modification of orders placed. Furthermore, transactions based on the recommendations or inducements to perform the transaction when the person that uses or discloses the recommendation or inducement knows or should know that it is based on inside information are considered insider dealing.
It will be presumed that the person with inside information has used it when trading or attempting to trade with the financial instrument to which the information refers, without prejudice to the rights of the defense.
However, not all uses of inside information are unlawful. Only that undermining the integrity of financial markets or investor confidence (Case Law Spector Photo, Judgment of the European Court of Justice of December 23, 2009 - case C-45/08) will be unlawful. Initially, for example, the actions of market makers, the execution of third-party orders or operations under “Chinese walls” are considered legitimate behaviors.
A person who obtains inside information on the occasion of a public takeover bid or a merger will not be presumed to engage in insider dealing if, at the moment of approval of the merger or acceptance of the public takeover bid, the information has become public or has otherwise ceased to constitute inside information. This presumption will not apply to stake-building.
Likewise, the mere fact that a person uses his or her own knowledge that it has decided to acquire or dispose of financial instruments in the acquisition or disposal of those financial instruments will not in itself constitute use of inside information.
Communication of inside information among potential investors for the purposes of sounding their interest in a possible transaction and its conditions is regulated.
The ability to conduct market soundings is important for the proper functioning of financial markets. Therefore, they should not in themselves be regarded as market abuse if they take place in the normal exercise of a person's job, profession or duties and comply with the following requirements:
- Anyone performing a sounding must first analyze whether inside information is being disclosed, record his or her conclusions in writing and prepare an insider list.
- Whoever receives the inside information must agree not to use it and must keep it confidential.
The Commission Implementing Regulation (EU) 2016/959 and Delegated Regulation (EU) 2016/960 lay down implementing technical standards for market soundings and the format of the records. Furthermore, on January 28, ESMA draft guidelines addressed to persons receiving market soundings (ESMA/2016/162), which are subject to public consultation.
Delay in disclosing inside information
As of July 3, the issuer will not need to report to the authorities its decision to delay disclosure of inside information until it becomes public. Then, the issuer will have to explain in writing that it fulfilled the conditions enabling this delay. The Commission Implementing Regulation (EU) 2016/347 lays down a single template to prepare the insider list.
As an exception, a prior control system is established when the issuer is a credit or financial institution, the inside information entails a systemic risk and it is in the public interest to delay its disclosure (e.g., because of a temporary liquidity problem).
The Commission Implementing Regulation (EU) Nº 2016/1055 lays down the implementing technical standards with regard to appropriate public disclosure of inside information and its delay.
Not only is market manipulation prohibited, but also any attempt at manipulation (e.g., a trading order that is not carried out). Furthermore, the definition of market manipulation is broadened to adapt it to new forms of securities trading and new strategies that may be abusive. For example, for the first time, it identifies which
high frequency trading (HFT) strategies are abusive and envisages the application of provisions on market manipulation to any behavior in relation to benchmarks (e.g., IBEX 35 or EURIBOR).
Annex I to the MAR and Commission Delegated Regulation (EU) 2016/522 provide a list of indicators to help detect possible market manipulation.
The concept of “accepted market practice” that makes it possible not to penalize actions that could give rise to manipulation is maintained. However, to prevent disparate practices among Member States, the procedure is amended for approval. Commission Delegated Regulation (EU) 2016/908 establishes the technical standards for the approval of this type of practices.
Prevention and detection of market abuse
It is clarified that managers of trading venues and professionals that prepare or carry out transactions in them must report suspicious transactions and suspicious orders (e.g., when the financial intermediary has refused to fulfill a client's order precisely because of its suspicious nature). Another novelty is that these obligations will affect the orders and transactions of the various trading platforms.
The Commission Delegated Regulation (EU) 2016/957 sets out mechanisms, systems and procedures to detect and report suspicious orders and transactions and the single electronic notification template, the STOR.
Transactions performed by directors and executives
A common notification rule is established throughout all Member States and a single template is approved by Commission Implementing Regulation (EU) 2016/523.
From a practical viewpoint, the transactions that may be notified are broadened, the notification period is reduced from five to three business days and, for the first time in our market, it regulates the prohibition against directors and executives to trade during 30 calendar days before the publication of an interim or annual financial report (restricted periods or “blackouts”). The Commission Delegated Regulation (EU) 2016/522 establishes the circumstances in which an issuer may authorize trading during a blackout.
At present, directors, executives and persons closely associated with them must report transactions performed on (i) shares admitted to trading on a regulated market, (ii) derivatives and (iii) other financial instruments associated with those shares. The MAB has a specific regime under which the company must report transactions performed by its directors and executives on its shares when they reach, exceed or drop below 1% or any multiple of it.
From July 3, transactions should be notified when performed by directors, executives and persons associated with them on
(i) shares, (ii) issuer debt instruments,
(iii) derivative instruments, and (iv) other financial instruments admitted to trading on regulated markets, MTFs or OTFs.
As a novelty, notification will not be necessary below a €5,000 threshold within one calendar year (calculated by adding without netting all transactions performed). Exceptionally, a competent authority may increase this threshold up to €20,000.
Stabilization and buy-back programs
"Safe harbors" are maintained for share buy-back programs and security stabilization, and their requirements are revised and implemented. The Commission Delegated Regulation (EU) Nº 2016/1052
lays down the technical standards regarding buy-back programmes and stabilisation measures.
Those who prepare or disclose investment recommendations must act diligently to ensure that the information is furnished objectively and, where appropriate, reveal potential conflicts of interest. The Commission Delegated Regulation (UE) 2016/598 provides the technical standards to this respect.
Member States must establish effective mechanisms and adequate protective measures to allow reporting of possible or real violations to the authorities.
For additional information on the contents of this document, please contact Cuatrecasas, Gonçalves Pereira.
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