MArket Abuse regulation (MAR)
MAR went live on 3rd July 2016, repealing the Market Abuse Directive of 2003. The scope is wider, there is more detail, and the sanctions are tougher. The FCA has warned that there will be no regulatory forbearance.
The Market Abuse Regulation will impact across business activities and their Front, Middle, and Back Offices. Firms will need to make substantial changes to their training, conduct, surveillance, record keeping, and reporting functions to be compliant.
MAR was written with MFID II in mind, using many of the MIFID II definitions. It has added detailed requirements aimed at preventing market abuse & attempted market abuse. The regulation places market abuse into three categories; market manipulation, insider dealing, and unlawful disclosure of inside information. There will be wide reaching implications for firms in terms of market surveillance, record keeping and disclosure requirements, as well as conduct training.
The scope of the regulation excuses very few areas. MAR encompasses instruments that are correlated to trading venues, and its reach is interterritorial – given that ESMA will not be publishing an exhaustive list of instruments in scope, firms will need to be particularly conscientious in identifying and monitoring their activities globally.
Firms are required to establish and maintain effective arrangements, systems, and procedures to detect and prevent market manipulation/abuse. MAR contains definitions, categories, and indicators of manipulation, with algorithmic and high frequency trading specifically included, as well as recognising the role that the internet and social media can play in facilitating abusive behavior. Market surveillance/monitoring should combine automation with human oversight. Not only will suspicious transactions need to be reported, but also suspicious orders – identifying these certainly throws up challenges, particularly with the FCA being vigilant on any under reporting. Firms will also have to monitor orders which did not reach the market, in other words the intention to commit market abuse is also prohibited.
Inside Information and Dealing
The definition of inside information has been expanded to include both the price sensitivity and reasonable investor test. MAR allows for the disclosure of inside information for certain activities, e.g. market soundings. Stringent rules will need to be adhered to, with a strong emphasis on detailed record keeping and relevant disclosures. There is also an onus on the person receiving inside information to decide if the information was indeed inside information.
The rules on Insider trading identify legitimate behaviours, being in possession of inside information does not give rise to the presumption that it was used – firms are required to demonstrate that they have implemented and maintained adequate and effective internal arrangements and procedures.
Investment recommendations will be subject to a whole raft of objectivity, disclosure and record keeping requirements, which will fundamentally change the way that this activity is conducted. Disclosure will have to be made each time the recommendation is made – which applies to both written and verbal recommendations. Disclosures will, amongst other things, need to include; details about the people involved in producing the recommendation, the history & changes to the recommendation, details of any valuation models used, whether the recommendation has been altered from the original, and any conflicts of interest; all looking back over the last twelve months.