The UK’s market abuse framework is changing through the coming into force of the Market Abuse Regulation (Regulation 596/2014) (MAR), which replaces the existing 2003 EU Market Abuse Directive. MAR comes into effect across the EU (including the UK) on 3 July 2016.
MAR, together with a new directive on criminal sanctions for breaches of the market abuse regime, are known as MAD II. However, the UK has opted out of the directive on criminal sanctions, and accordingly MAD II, as it applies in the UK, refers only to MAR.
In addition to prescribing market abuse offences, MAR addresses the management and disclosure of inside information and the maintenance of insider lists (currently set out in Disclosure and Transparency Rule (DTR) 2 for main market companies and AIM Rule 11 for AIM companies) and the PDMR notification regime (currently set out in DTR 3 and, for directors of AIM companies, AIM Rule 17).
Purpose of MAR
The purpose of MAR is to establish a common regulatory framework across the EU to confront market abuse. In the words of the introduction to MAR:
“the [2003 Market Abuse Directive] completed and updated the Union’s legal framework to protect market integrity. However, given the legislative, market and technological developments since the entry into force of that Directive, which have resulted in considerable changes to the financial landscape, that Directive should now be replaced. A new legislative instrument is also needed to ensure that there are uniform rules and clarity of key concepts and a single rule book…“
MAR addresses all aspects of market abuse, which, in the EU’s view, is a “concept that encompasses unlawful behaviour in the financial markets and, for the purposes of this Regulation, it should be understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation“.
MAR, as an EU regulation, has direct effect in each EU state and does not require any further legislation for it to have effect in national law. It comes into force across the EU from 3 July 2016. On 28 September 2015, the European Securities and Markets Authority (ESMA) published its final draft version of technical standards (ESMA Standards) to support the implementation of MAR.
The FCA is expected to publish its consultation paper on the implementation of MAR later this month/early November. The FCA consultation paper will address the changes to the Handbook required to accommodate MAR, and the FCA’s proposals in those areas where it has, as the UK competent authority, discretion in the detailed implementation of MAR.
Principal changes under MAD II
The UK will probably experience less change through the implementation of MAR – given the super-equivalent approach it adopted to the implementation of the 2003 Market Abuse Directive – than some other EU jurisdictions, where securities regulation is perhaps currently less well developed. However, there are significant changes coming down the track and the regulatory environment will, in a number of respects, be further tightened.
Extended regulatory perimeter
Applicable markets and trading facilities
MAR applies to financial instruments traded on all regulated markets (as did the 2003 Directive) but extends the regulatory reach to cover instruments traded on “multilateral trading facilities” and “organised trading facilities”. This will include AIM in the UK. MAR also covers trading in other financial instruments outside of those markets, which are themselves dependent on the price of a financial instrument traded on one of the prescribed markets (for example contracts for differences or credit default swaps). MAR applies regardless of the location of the relevant activity – it does not need to occur on a relevant market in order for it to be caught by the MAR.
MAR’s reach means that, for the first time, the control and disclosure of inside information, maintenance of insider lists and PDMR dealing notification in respect of AIM companies will be governed by MAR and enforced by the FCA. AIM has always been within the UK’s market abuse regime.
EU emissions allowances
All emissions allowances which are traded under the EU Emissions Trading Scheme are financial instruments for the purposes of the new market abuse regime. Spot trading in emissions allowances are also within the scope of MAR.
In light of the LIBOR and other rate-setting scandals, the manipulation of benchmarks (being, in broad terms, any rate, index or figure by reference to which the amount payable under a financial instrument or the value of a financial instrument is determined) falls within the scope of MAR.
Delaying disclosure of inside information – new retrospective notification obligation
As under the existing regime under DTR 2, under MAR issuers are permitted to delay disclosure of inside information where:
- immediate disclosure is likely to prejudice the legitimate interests of the issuer;
- delay of disclosure is not likely to mislead the public; and
- the issuer is able to ensure the confidentiality of that information,
but this is now coupled with an obligation on issuers to notify the relevant competent authority (in the UK, the FCA) after the fact that it had delayed disclosure and provide a written explanation as to how the three conditions set out above were met (to be provided either by default or on request, at the discretion of the competent authority of the relevant member state).
Market soundings – bringing people inside
MAR contains equivalent restrictions on the improper disclosure of inside information as under the existing DTR 2 regime. MAR recognises the utility of market soundings – where an issuer or its advisers (the “disclosing market participant”) communicates “information, prior to the announcement of a transaction, to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing, to one or more potential investors“, and provides a carve out from the general prohibition for this activity, subject to strict procedural requirements.
Prior to conducting a market sounding, a disclosing market participant must:
- specifically assess whether the market sounding will involve the disclosure of inside information; and
- make a written record of its conclusion and the reasons for reaching it (and provide this written record to the competent authority upon request).
Before making the disclosure, the disclosing market participant is required to:
- obtain the consent of the person receiving the market sounding to receive inside information;
- inform the person receiving the market sounding that he is prohibited from using that information, or attempting to use that information, by:
- acquiring or disposing of, for his own account or for the account of a third party, directly or indirectly, financial instruments relating to that information; or
- cancelling or amending an order which has already been placed concerning a financial instrument to which the information relates; and
- inform the person receiving the market sounding that by agreeing to receive the information he is obliged to keep the information confidential.
It was originally contemplated that a pro-forma script would be prepared by ESMA in order to ensure compliance with these procedural requirements. However, that approach has been abandoned, with detailed procedures on the conduct of market soundings now being set out in Chapter 4 of the ESMA Standards.
The disclosing market participant must make and maintain a record of all information given to the person receiving the market sounding, including the prescribed information given and the identity of the potential investors to whom the information has been disclosed, and the date and time of each disclosure. The disclosing market participant must provide this record to the competent authority on request.
The existing regime on insider lists is largely preserved, with a new pro-forma insider list with mandatory fields being prescribed by the ESMA Standards (Annex 1, p.306). These fields require the inclusion of personal contact information, such as personal mobile phone numbers. Separate lists for deal/information-specific and “permanent” insiders can be maintained.
MAR provides flexibility for issuers admitted to SME growth markets (as defined in MiFID II and likely to include AIM in the UK) and exempts them from the need to maintain and update insider lists provided that:
- they take all reasonable steps to ensure that any person with access to inside information acknowledges the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information; and
- they are able to provide the competent authority, upon request, with an insider list.
SMEs will not be required to provide personal contact information (such as personal phone numbers), unless it was already known to them at the date of request by the competent authority. A separate template for SME issuers is set out at Annex 2 of the ESMA Standards (p.310).
PDMR dealing notifications
The PDMR dealing notification regime (currently in DTR 3) is largely preserved, with PDMRs and their “closely associated persons” (broadly, spouses, dependent children, co-habiting family members and related trusts, companies and partnerships controlled by such persons) being obliged to notify all dealings in the financial instruments of the issuer. The principal changes to the existing regime are:
- a default €5,000 annual dealing threshold will apply to dealings before the notification requirement bites (although this may be increased to €20,000 by the relevant competent authority in each member state);
- the PDMR (or associated person (as the case may be)) is obliged to notify both the issuer and the relevant competent authority of the dealing;
- the period for notification by the PDMR to the issuer is reduced from four to three business days; and
- the PDMR notification regime will be extended to cover AIM companies, in line with the general regulatory scope of MAR (currently, directors’ dealing are reported under AIM Rule 17).
Extension of manipulation offences
The current offence of market manipulation is extended to cover attempted manipulation. Attempts may include situations where the activity is commenced, but not completed. This could happen, for example, as a result of failed technology or an instruction to trade that is not acted upon.
The next steps in the UK will be the publication by the FCA of its consultation paper on the proposed changes to the FCA Handbook necessary to reflect the implementation of MAR. We expect this later this month or in early November, and we will cover that paper and future developments in MAD II implementation in later editions of this update. In the interim, if you have any questions on MAD II and MAR, please contact any of our experts below.