Market Abuse Regulation (MAR) Explained
29 June, 2020
29 June, 2020
The Market Abuse Regulation, introduced in 2016, aims to protect investors by increasing transparency in the financial markets and quelling market abuse. In an effort to standardise market abuse regulations across the EU, this new European regulation puts resolute measures in place to extend the scope of pre-existing regulations. It also aims to cope with the accelerating complexity of technology in the financial markets and the growing remit of financial crime worldwide.
What is Market Abuse?
Market abuse refers to the practice of misusing information in order to disadvantage financial market investors or to gain an unfair advantage as an investor. This is usually done in one of three ways: using advantageous information that the public do not have; distributing incorrect information; or skewing price-setting mechanisms of financial instruments.
The Market Abuse Regulation outlines three main forms of market abuse:
- Insider Dealing – This is the act of utilizing inside information in order to make, change, or cancel deals, or to encourage a third-party to deal using this knowledge.
- Unlawful disclosure of inside information – This is the act of releasing information without correct permissions.
- Market manipulation – This is the umbrella term for a series of actions which distort market performance.
What is the Market Abuse Regulation (MAR)?
The Market Abuse Regulation (596/2014/EU) (MAR) came into force on July 3rd 2016. This regulation rescinds the previous Market Abuse Directive (2003/6/EC) (MAD), replacing it with an extended scope. The original concept behind MAD was to create a unified framework for EU-wide market abuse regulations to ensure an effective and coherent informational workflow across the member states. In doing this, legislators hoped to demonstrate robustness for outside investors and better cross-border cooperation.
The idea of this new, stricter form of market abuse legislation is to strengthen market integrity and investor protection and to guarantee a universal playbook across all EU member states. MAR not only fortifies previous legislations, but also enhances it by extending its scope to introduce new offences. By doing this, the regulation hopes to increase activity in the securities markets. According to the Financial Conduct Authority in the UK (FCA):
“MAR aims to increase market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising.”
In generic terms, the regulation penalises insider trading, market manipulation, and unlawful disclosure of information. It gives national regulatory authorities the responsibility to detect and protect against market abuse, while instilling these bodies with the power to enforce sanctions against non-compliant parties. MAR also outlines provisions for detection and compliance.
Scope: Who Does MAR Apply To?
MAR does not refer to individuals or companies but to financial instruments and behaviours or transactions.
There are four main categories of financial instruments that are covered by MAR. These are:
- financial instruments admitted to trading on a regulated market or for which a request for admission to trading on a regulated market has been made
- financial instruments traded on a multilateral trading facility (MTF), admitted to trading on an MTF, or for which a request for admission to trading on an MTF has been made
- financial instruments traded on an organised trading facility (OTF)
- financial instruments not covered by point (a), (b) or (c), the price or value of which depends on or has an effect on the price or value of a financial instrument referred to in those points, including, but not limited to, credit default swaps and contracts for difference
In terms of behaviours and transactions, MAR also covers certain types of bids. If the auction platform is considered to be a regulated market of emission allowances or similar auctioned products, MAR applies. This is still the case if the products being auctioned aren’t considered to be financial instruments.
Even though MAR is an EU regulation, technically, it applies worldwide. The global scope is outlined in the regulation as such:
“The prohibitions and requirements in [MAR] shall apply to actions and omissions, in the Union and in a third country, concerning [financial instruments within the scope of MAR].” (Article 2(4))
MAR encompasses not only financial instruments within the EU regulation market, but also any financial instruments which are dealt on an organised trading facility (OTF) or a multilateral trading facility (MTF). Since financial instruments traded on OTFs or MTFs can, theoretically, be based anywhere in the world, MAR’s reach extends across the globe.
Summary of MAR
Announcing a Transaction: Market Soundings
The term ‘market sounding’ refers to the act of communicating information before a transaction is announced, in order to measure potential interest from prospective investors. Usually, this process involves investigating the potential size or price of a possible transaction, the condition in which it may occur, and how many investors would be interested. This practice most often occurs in relation to block trades or private placements.
The sensitive nature of this procedure means that it is tightly regulated by MAR. Article 11 is responsible for outlining the applicability and procedures pertaining to market sounding, along with further, more detailed provisions in the Commission Delegated Regulation (EU) 2016/960, the Commission Implementing Regulation (EU) 2016/959 and the ESMA guidelines.
Foremost, the term market soundings applies to issuers, secondary offers of financial instruments, and third parties who act on behalf of either of these two parties.
In addition to these parties, market sounding regulations also apply to relevant shareholders under certain conditions. For example, if a company were to consider a merger deal, there may be a case to release this inside information to its shareholders. However, the conditions state that this is only allowable if the shareholders’ opinion is crucial to making the decision for the merger to be executed or kiboshed.
In the case where all protocols for a market sounding are met, disclosing market participants are covered against the suspicion of market abuse, and are considered to be granted with a ‘safe harbour’. If the applicable conditions are met, the disclosure of inside information in a market sounding is deemed as a person’s normal professional duties.
Importantly, while market soundings can be undertaken via in-person meetings, telephone, video, in writing, or by electronic mail, market soundings must be recorded. Participants must be notified and give permission for the recording beforehand. In the case of in-person meetings, a notetaker can write minutes, which need to be signed by all parties within five business days. Following this, records of market soundings must be securely stored for five years.
Before a market sounding can take place, the recipient of the market sounding needs to be informed of certain information and should give consent to receive this information. The recipient must be made aware of the fact that a market sounding will take place, that this will include inside information, and that conversations will be recorded. Recipients must also be informed of an estimate of a date of when the information ceases to be inside information, along with a statement regarding confidentiality. The recipient will assess whether they are entitled to receive such information and declare this.
Market Abuse Offences
There are three categories of market abuse offences according to MAR. These are:
- Insider dealing
- Unlawful disclosure of inside information
- Market manipulation
Within these three categories, there are seven behaviours which detail what is and isn’t considered market abuse.
Insider dealing refers to the use of inside information to execute deals to one’s advantage. This includes the execution of orders based on inside information, as well as the cancellation and amendment of orders based on insider information.
For example, a company executive knows that the company is about to receive a large funding deal (an event likely to be deemed inside information). This company executive could execute a trade knowing that the company’s share prices will go up. This would be considered insider dealing because inside information is being used as an unfair advantage.
Importantly, MAR specifies that insider dealing not only covers the execution of trades, but also the amendment and cancellation of orders based on inside information.
For example, imagine a company executive places a large order but finds out the CEO is stepping down within the next month (an event likely to be deemed inside information). Cancelling or amending this order based on this inside information, before the information is made public, would be classified as insider trading.
Equally, MAR puts measures in place to prevent collusion between third parties. The regulation also prevents persons with access to inside information from leveraging that information to encourage a third party to place, amend, or cancel advantageous deals. This includes offering up tips and recommendations to another person to place transactions based on inside information.
Unlawful Disclosure of Inside Information
Unlawfully disclosing inside information occurs when a person with access to inside information passes that knowledge along to another person. The only exceptions to this are if the disclosure is a regular facet of the person’s employment or professional duties.
The definitions for market manipulation are laid out in Article 12 of MAR. It refers to the act of misleading the market through certain activity or to activities that manipulate the price.
In line with this, MAR specifically prohibits persons to place orders or behave in any way that offers purposely misleading signals regarding the supply and demand or a financial instrument, or its potential price. To support this, it is also forbidden to produce and distribute information that purposely misleads the market on supply and demand or that indicates a false price. Extending the scope from previous legislations, MAR explicitly outlaws the manipulation of benchmarks.
Article 12 also specifies that market manipulation can include the collusion to secure a dominant position over the supply or demand of financial instruments, auctioned products (based on emission allowances), or spot trading commodities with the view of creating unfair trading conditions. The act of disrupting or delaying trading systems is also considered to be market manipulation, as well as overloading or destabilisation of order books.
Annexe I of MAR gives an extensive list of possible activities which could signal the presence of market manipulation.
Market manipulation regulations relate to all financial instruments traded on regulated markets, MTFs and OTFs. This includes securities, but also extends to derivative transactions, spot commodity contracts, and market instruments if affected by the price/value of a financial instrument.
What Information Do You Have to Disclose Under MAR?
Ensuring the correct protocol for the disclosure of information is vital to staying compliant with MAR.
Disclosure of Inside Information
When considering the disclosure of inside information, it is integral to understand what is classified as inside information. In order to be seen as inside information, the knowledge needs to relate to a particular issuer or financial instrument and should be precise in nature. Inside information, by its very definition, has not been made public yet. However, if or when such information is made public, it would likely have a notable effect on the price of its relevant financial instruments.
According to MAR, inside information should be disclosed to the public as soon as possible. When inside information is disclosed, the information should be full and complete, and free from errors. Inside information should be revealed in a way that enables fast access to facilitate the public in coming to a timely conclusion on the importance of this information.
It is expressly noted that the release of such pertinent and sensitive information should not be done in conjunction with any marketing activities, as this may confuse the disclosure.
Once revealed, the disclosure of this inside information should be posted and maintained publicly (usually on a website) for five years.
Delay of Disclosure of Inside Information
The delay of inside information is allowed if an issuer or emission allowance market participant (EAMP) sees fit, however, it comes with tight conditions. Per Article 17 of MAR, delay is only permitted if:
- immediate disclosure is likely to prejudice the issuer’s legitimate interests;
- delay of disclosure is not likely to mislead the public;
- and the issuer is able to ensure the confidentiality of the information.
In order to stay compliant with MAR, all delays in disclosure of inside information must be reported to the relevant National Competent Authority immediately following disclosure. Appropriate records should be kept to outline the details of the delay of disclosure, although these do not need to be submitted unless requested.
Suspicious Transaction Reporting
With the view of market abuse prevention, any person who arranges transactions must establish effective procedures for recognising and reporting suspicious orders or transactions. According to the regulation, reports should be made to relevant authorities if a person suspects foul-play with any financial instrument, either on or outside a trading venue. Any activity that could be considered as insider dealing or market manipulation needed to be reported, along with any attempts at these two activities.
The practical steps for establishing effective procedures for reporting suspicious activity include the creation of detailed policies that outline criteria for assessing suspicious activity, as well as the installation of effective surveillance systems that monitor and flag suspicious activity. These procedures must include processes for reporting suspicious orders and transactions to the relevant authorities in a timely manner. Frequent and comprehensive staff training programs must be put in place to keep relevant staff up to date with all procedures related to the reporting of suspicious activity.
In order for full compliance, meticulous record-keeping is essential. Whereby information pertains to decisions made regarding suspicious activity, records must be kept on file for five years. This refers to both reports where suspicion was deemed valid and those where the suspicion was concluded to be unreasonable.
Investment recommendations are outlined in MAR as:
“Information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers, including any opinion as to the present or future value or price of such instruments.” Article 3(1)(35)
There is no explicit timescale for recommendations of this type nor is there a definition on specific price targets. MAR, instead, refers to any and all recommendations on investing in EU financial instruments, regardless of timescales on future investment.
Recommendations that are made by a potential insider must be accompanied with a disclosure of interest, which includes the recommender’s identity, job title, and relevant authority. Equally, disclosures should go into detail on whether the recommendation is based on opinion or fact, and if so, which facts, and any material assumptions that accompany this. It should also include any forecasts, projections, or price targets that underline the recommendation.
In MAR, a Person Discharging Managerial Responsibilities (PDMR) of an issuer or EAMP refers to a member of the managerial, supervisory, or administrative body of the organisation. Also included under this umbrella term is any senior executive not covered in the above bracket, but who has regular exposure to inside information and has power to make key decisions that shape the future of the entity in question.
Under MAR, PDMRs are required to notify relevant authorities of any order or transaction undertaken on personal accounts that relate to the issuer or EAMP. This applies to all financial instruments, including, but not limited to, shares, derivatives, and debt instruments. In most countries, PDMRs must notify relevant authoritative bodies of all transactions once a predefined threshold has been reached within one calendar year. The threshold may be anywhere between € 5,000 and €20,000, depending on the member state. Notifications of PDMR transactions must be made within three business days to stay compliant.
Record-Keeping and Insider Lists
Record-keeping is an integral element of remaining compliant with MAR. One of the most important facets of record-keeping is the creation and proper maintenance of insider lists.
In particular, companies must create comprehensive lists that denote the names and identities of the persons within the organisation with access to insider information. According to the ESMA guidelines, these lists must be kept up-to-date and in the correct format. Entries on insider lists should include information pertaining to the date and time of receipt of inside information, along with extensive documentation of the individual’s personal information at the time.
In this sense, entities are permitted to keep permanent and event-based insider lists. Permanent insider lists are reserved for persons within an entity who always have access to inside information, whereas event-based lists are for those who only receive inside information in relation to certain events.
Record keeping is a stringent process for compliance with MAR. All suspicious reports, records of inside information, disclosure delays, and so on, must be retained for five years. Regulatory authorities have been granted the power to request these records at any time and can demand records of telephone conversations, data traffic records, and electronic communication.
A ‘safe harbour’ is the term for exceptions where certain behaviours are considered exempt from MAR.
Buy-back Programmes and Stabilisation Measures
Buy-back programmes and stabilisation measures are exempt from MAR when all other conditions of the regulation have been met.
A buy-back programme or a share repurchase programme refers to the act of a company buying back its shares to reduce the number of shares available on the market. This often helps to stabilise a company or serves to reward shareholders.
Stabilisation measures are policies taken to ensure the economic stability of a company, such as trading in securities for the sole purpose of stabilisation.
Accepted Market Practices (AMPs)
Accepted market practices are safe harbours that are not outlined in MAR. The regulation enables National Competent Authorities (NCAs) to establish certain practices which are only relevant to their specific jurisdiction.
According to MAR Article 30(2), NCAs are given the power to impose a variety of sanctions on infringements of the market abuse regulation. This can come in the form of a public warning identifying the perpetrator(s), a cease and desist order, disgorgement of profits made from illicit activity, a ban or suspension on an investment firm or manager, and sizeable financial penalties.
Below is a table of the maximum administrative pecuniary sanctions, as outlined in ESMA’s market abuse regulation summary of sanctions.
|MAR Article Infringement||Maximum Administrative Pecuniary Sanctions|
|Natural Persons||14 and 15||€5,000,000|
|16 and 17||€1,000,000|
|18, 19, and 20||€500,000|
|Legal Persons||14 and 15||€15,000,000 or 15% of total annual turnover|
|16 and 17||€2,500,000 or 2% of total annual turnover|
|18, 19, and 20||€1,000,000|
MAR and MiFID II
The initial Markets in Financial Instruments Directive (MiFID) was introduced in 2007 to replace the Investment Services Directive. The idea was to protect investors and improve market competitiveness across the EU. In response to the financial crisis of 2008, the MiFID II and corresponding Markets in Financial Instruments Regulation (MiFIR) were created. The MiFID II mainly focuses on trading venues or structures in which financial instruments are traded, whereas the MiFIR relates to regulating the operations of these venues. Designed to address the shortfalls of the original MiFID, these regulations expand to cover the huge leaps in financial innovation and corresponding technology.
MAR, designed to strengthen reactions to market abuse, is also designed to increase market attractiveness by heightening investor protection. Expanding the definition of market abuse, MAR also aims to cope with the rapid growth of technology, and the complications it brings.
By bringing these two regulations together, the EU is aiming for a more transparent marketplace for consumers, who are now privy to more information than ever before. By offering investors better insight into products and services offered on the market, along with transparency in processes, these two regulations will work in tandem to drive competitiveness in the financial markets.
How to Stay Compliant with MAR
Staying compliant with MAR is two-fold. On the one hand, entities need to ensure that they are promptly disclosing and recording all inside information in a compliant manner. On the other hand, staying compliant with MAR means putting processes in place to ensure that market abuse is being identified, reported, and recorded to the relevant authorities.
To stay compliant in terms of disclosure of inside information, it is advisable to refer to ESMA’s guidelines and technical standards. By ensuring all staff are properly trained in the procedures regarding inside information, organisations can make sure that insider lists are correct and up-to-date, and standards and protocols are being met in regards to the disclosure of inside information.
In terms of complying with this European market regulation, with the view of preventing market abuse, it is important that entities have formal policies and procedures in place for the identification, mapping, monitoring, and reporting or suspicious activity and potential market abuse. Equally, staff must receive regular training to ensure these procedures and policies are being implemented effectively.
In terms of identification of market abuse, entities must outline which market abuse behaviours are relevant, as not all behaviours are pertinent to all firms. While MAR generally describes manipulative behaviour, market abuse can take many forms, from phishing to abusive squeeze, from wash trades, to pump and dump schemes. In this sense, firms must identify the behaviours from which they are most at risk.
The mapping phase of compliance ties each market abuse behaviour to a trigger which will alert of suspicious activity. This process enables the internal system to flag these types of behaviours. Efforts should be made to prevent as many ‘false positives’ as possible.
Once accurate alerts have been established, firms must monitor ongoing behaviour to recognise any alerts of suspicious activity as they occur. In accordance with due diligence procedures, monitoring should be accurately documented.
Any suspicious activity that occurs should be reported directly to the relevant authorities, accompanied with the relevant audit trail to support due diligence. Entities should keep precise records for up to five years, using these records and alerts as a route to reducing risk and improving the accuracy of the monitoring system.
The Market Abuse Regulation is a comprehensive legislative document that helps to protect investors and encourage market activity by preventing market abuse. Aiming to create a standardised framework across EU members, MAR offers definitions and standards for identifying, monitoring, and reporting market abuse, as well as the protocols for dealing with and disclosing inside information.