The final texts of the Market Abuse Regulation (MAR) and the Directive on criminal sanctions for insider dealing and market manipulation (CSMAD) were published in the Official Journal of the EU (the OJ) on 12 June 2014. Both MAR and the CSMAD come into force 20 days after publication in the OJ (3 July 2014).
The majority of MAR’s provisions will apply from 3 July 2016 (on which date the existing Market Abuse Directive (MAD) and its implementing legislation will be repealed). Certain provisions, which are covered in Article 39(2) of MAR will apply from 3 July 2014, immediately on entry into force of MAR.
Member States must transpose the CSMAD’s provisions into national law by 3 July 2016. However, the UK has decided to opt out of the CSMAD. Under the Lisbon Treaty, the UK and Ireland are not automatically bound by EU legislative proposals in respect of the area of freedom, security and justice matters. Instead, they may decide whether to opt in to any measure on a case-by-case basis. The CSMAD falls into this category.
MAR extends the scope of the EU market abuse framework to apply not only to financial instruments admitted to trading on an EU regulated market (or for which a request for admission to trading has been made), but also, for the first time to:
- any financial instrument admitted to trading on a European multilateral trading facility or organised trading facility (the new type of trading venue which is being introduced by MiFID II / MiFIR); and
- any related financial instrument traded over-the-counter (OTC), which can have an effect on instruments which are traded on any trading venue within the scope of MAR.
MAR expressly recognises an OTC credit default swap as an example of a related financial instrument. MAR also extends the scope of the regime to capture emissions allowances.
Commodity derivatives and related spot commodity contracts
Whilst MAR is not intended to directly govern related spot markets, the European Commission (the Commission) wanted it to cover transactions or behaviour in those spot markets which are related to, and have an effect on, the financial and derivative markets which are within the scope of MAR. Therefore MAR:
- aligns the definition of inside information relating to commodity derivatives to the general inside information definition, extending it to cover price sensitive information which is relevant to the related spot commodity contract as well as to the derivative itself; and
- extends the definition of market manipulation to capture cross-market manipulation, that is transactions in the derivatives markets that can be used to manipulate the price of the related spot markets, and transactions in the spot markets that can be used to manipulate the derivatives markets.
In addition, MAR requires competent authorities to co-operate and exchange information with national and third country regulatory authorities responsible for related spot markets, where they have reasonable grounds to suspect that behaviour amounting to market abuse is being, or has been, carried out. MAR states that this co-operation will “ensure a consolidated overview of the financial and spot markets, and detect and sanction cross market and cross-border market abuses.”
Definition of inside information
The definition of ‘inside information’ in MAR follows the definition set out in MAD being:
- information of a precise nature;
- which has not been made public;
- relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments; and
- which if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
In addition, MAR provides for an additional limb to the definition which states that information which, if made public, would be likely to have a significant effect on the prices of financial instruments, “shall mean information a reasonable investor would be likely to use as part of the basis of his investment decisions.” The wording tracks the same wording in Commission Directive (2003/124/EC) implementing MAD as regards the definition and public disclosure of inside information and the definition of market manipulation.
Emission allowances are reclassified under MAR as financial instruments and as such will fall within the scope of the market abuse framework. A specific definition of inside information for emission allowances is introduced.
In addition to providing a non-exhaustive list of examples of market manipulation, MAR confirms that attempting to engage in market manipulation is prohibited. Also prohibited is the attempted or actual manipulation of benchmarks. The spreading of false and misleading information now includes rumours and false or misleading news. The dissemination of false or misleading information through social media is also prohibited.
Algorithmic and high frequency trading
MAR specifies certain examples of strategies using algorithmic trading and high frequency trading which would fall within the prohibition against market manipulation or attempts to engage in market manipulation.
Buy-back programmes and stabilisation
Like the existing EU market abuse regime MAR provides for buy-back programmes and stabilisation measures. Under Article 3 of MAR, provided certain conditions are met, these programmes and measures will fall outside the market abuse prohibitions. The Commission is to adopt Level 2 delegated acts, that will specify the conditions that buy-back programmes and stabilisation measures must satisfy, including the conditions for trading, restrictions on time and volume, disclosure and reporting obligations and price conditions.
Accepted market practices
As part of the maximum harmonisation approach under MAR, the decision has been made to remove and phase out accepted market practices. Article 35 of MAR is a transitional provision to the effect that accepted market practices that existed prior to the date on which MAR comes into force may remain applicable for 12 months after that date.
MAR contains a number of disclosure requirements most noticeably it:
- permits issuers (and emission allowance market participants) to delay the public disclosure of inside information so as not to “prejudice [their] legitimate interests”, provided certain conditions are met;
- provides that the precise data to be included in insider lists will be defined in Level 2 delegated acts;
- provides for disclosure requirements regarding financial instruments admitted to trading on SME growth markets; and
- seeks to clarify the scope of reporting obligations regarding managers’ transactions.
Without prejudice to the criminal sanctions in the CSMAD, MAR provides for a set of administrative sanctions and other administrative measures that include, among others, the possibility of imposing a ban from exercising management functions within investment firms. The possibility for Member States to impose both administrative and criminal sanctions for the same offence is confirmed in MAR.
The maximum amount of the administrative fines that can be imposed by competent authorities varies in accordance with the offence as well as the person involved. For example, natural persons infringing the prohibition of insider dealing or market manipulation may be fined up to EUR 5,000,000 while legal persons may be fined up to EUR 15,000,000 or up to 15% of their turnover, as the case may be on a consolidated basis, for the same offences.
The CSMAD complements MAR by introducing minimum rules on criminal offences and criminal sanctions for market abuse. This is a change to the existing EU market abuse framework in the sense that it currently requires Member States to adopt administrative sanctions which are “effective, proportionate and dissuasive”, but gives them the freedom to decide whether or not to impose criminal sanctions.
The CSMAD requires Member States to ensure that the criminal offences defined in the Directive are punishable by criminal penalties and sanctions which are “effective, proportionate and dissuasive” when they are committed intentionally and at least in serious cases. In order for the sanctions for the offences to be effective and dissuasive, the CSMAD provides for maximum sanction levels of at least four years’ imprisonment for market manipulation, insider dealing and recommending or inducing another person to engage in insider dealing and two years’ imprisonment for the unlawful disclosure of inside information.
As mentioned above the UK has decided to opt out of the CSMAD. However, it is worth noting that in his recent Mansion House speech the Chancellor of the Exchequer, George Osborne MP, stated that the UK Government will be introducing new domestic criminal offences for market abuse.
Level 2 MAR
On 28 May 2014, the Commission published a mandate seeking technical advice from the European Securities and Markets Authority (ESMA) on the implementing measures under MAR. ESMA is invited to deliver the technical advice within 8 months after MAR’s entry into force (by 3 March 2015).