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Market Abuse: Ramping up the regulation

Market abuse continues to be a focus area for the regulators and prosecutors, as evidenced by the multitude of fines imposed by the UK Financial Conduct Authority, and the investigations and prosecutions relating to benchmark, write Jessica Thomas and Abdulali Jiwaji from boutique law firm Signature Litigation.

The upcoming implementation of the Market Abuse Directive II (MAD II) indicates that there will be no let-up in this kind of enforcement activity. The MAD II ‘package’, which will take effect from 3 July 2016, comprises the Market Abuse Regulation (MAR) and the EU Criminal Sanctions for Market Abuse (CSMAD). The MAR will repeal and replace the existing Market Abuse Directive. The UK has not opted into CSMAD and is therefore not obliged to transpose its provisions into national law.

The current market abuse regime

Market abuse covers both insider trading, the use of inside information when trading in related financial instruments, and market manipulation, the manipulation of the markets through practices such as spreading false information or rumours and conducting of trades which secure prices at abnormal levels. The original regime was introduced in order to guarantee the integrity of European financial markets and increase investor confidence. It brought in requirements for insider lists, suspicious transaction reports and the disclosure of managers’ share transactions. It also gave national competent authorities powers to investigate, take administrative measures and impose effective, proportionate and dissuasive sanctions.

The new regime

The aim of the MAR is to expand the original regime, aimed at supporting the smooth functioning of the securities markets and encouraging public confidence. The changes include:

(1) An extension of the application of the market abuse framework

The regime will be extended to include any financial instrument admitted to trading on a multilateral trading facility, over-the-counter (OTC), or an organised trading facility, the latter being a new category of trading venue. This is to ensure that the rules can cope with the introduction of new technologies and platforms. The definition of inside infor – mation will be extended to include commodity derivatives, which have become increasingly global and intertwined with derivative markets. Manipulation through algorithmic and high frequency trading will also be covered.

(2) The creation of wider market abuse offences

The new regime will extend to any attempts to engage in market manipulation. It also prohibits any attempted or actual manipulation of benchmarks, picking up on recent episodes relating to LIBOR, FX and other benchmarks. The spreading of false and misleading information offence will include rumours and false or misleading news, and the dissemination of false or misleading information through social media is also prohibited. As to the definition of inside information, rather than focussing on whether or not information might be price sensitive, one will have to consider whether the information was information which a reasonable investor would be likely to use as part of the basis of its investment decisions.

(3) The creation of a more stringent whistleblower regime

This includes the introduction of: specific procedures for the receipt and follow-up of infringement reports, including the establishment of secure communication channels for such reports; appropriate protection in the workplace for whistleblowers reporting breaches or who are accused of breaches; measures to protect the identity of whistleblowers and those who are the subject of reports (unless national law provides that the confidentiality cannot be protected); and financial incentives for whistleblowers when reporting suspected market abuse (much like the current regime in the US when disclosing misconduct to the SEC).

(4) New sanctions and increased power of competent authorities

The UK has opted out of CSMAD but UK firms operating across EU Member States’ borders should note that CSMAD requires all Member States to create harmonised criminal offences of insider dealing and market manipulation, and to impose criminal terms of imprisonment of at least two to four years, depending on the relevant offence.

The MAR also sets out a minimum set of supervisory and investigatory powers with which national competent authorities will be entrusted under national law. These include the right to: access any document or data and to receive or take a copy thereof; carry out onsite inspections or to require recordings or data traffic held by investment firms, credit institutions or financial institutions and, insofar permitted by national law, by telecommunications operators; and impose a temporary prohibition of the exercise of professional activity.

Outlook

The UK already has a well-established regulatory and criminal regime for market abuse; however, MAR will bring a unified approach throughout Europe which will without doubt affect the treatment of cross-border transactions and financial relations. The FCA has predicted that the result of this will be to increase market integrity and investor protection across the EU, ultimately increasing the attractiveness of securities markets for raising capital within the EU.

This article was originally published in FX-MM Magazine and can be viewed here.