Market abuse – new trading technologies & market manipulation

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The increasingly global nature of financial markets has given rise to new trading platforms and technologies, the downside of which is the numerous ways in which these markets can be manipulated. After the LIBOR scandal there have been serious concerns raised by governments and regulators about the manipulation of benchmarks which can result in significant losses for investors and distortion of economies.

Persons trading on insider information and manipulating markets by spreading false or misleading information can currently avoid sanctions by taking advantage of differences in law between EU Member States. This is compounded by some countries’ authorities lacking effective sanctioning powers, while in others, criminal sanctions are not available for certain insider dealing and market manipulation offences.

As part of its work to make financial markets sounder and more transparent, the European Securities and Markets Authority (ESMA) oversaw the implementation of the original Market Abuse Directive (MAD) in 2005, which resulted in an EU-wide market abuse regime and a framework for establishing a proper flow of information to the market.

MAD II or the Market Abuse Regulation (EU) 596/2014 (MAR) will come into effect in the UK from 3 July 2016. It sets out to strengthen the current rules and regulations by extending its scope into new markets, platforms, instruments and market practices. In the main it attempts to increase market integrity and investor protection whilst also creating a single rulebook across the EU.

MAR applies to all financial instruments which are traded on a regulated market, a multi-lateral trading facility (MTF), an organized trading facility (OTF) and financial instruments not included above but which either affect the price of, or whose price is affected by those which are included (for example, credit default swaps and contracts for difference). In addition to the MiFID definition of financial instruments, MAR also applies to emission allowances and spot commodities.

Timetable
9 Nov 2015 – ESMA published Q&As on the operation of MAR
4 Feb 2016 – deadline for commenting on the FCA’s
Consultation paper 15/35 on policy proposals and FCA Handbook changes related to MAR
3 July 2016 – MAR and level 2 texts apply
3 Jan 2017 – MAR provisions dependent on MiFID II apply

SUMMARY OF THE MAR REQUIREMENTS

Market manipulation – The offence has now been extended to attempted manipulation. Also included in scope are benchmarks and spot commodities. Activities now considered as manipulation are, acting in collaboration to secure a dominant position over supply or demand of a financial instrument and some disruptive algorithmic trading.

Inside information and disclosure – Spot commodity contracts will now be considered within the inside information definition.

Inside information and unlawful disclosure – Amending or cancelling an order with inside information will now be considered insider dealing. Recommending or inducing another person to transact on the basis of the inside information now amounts to unlawful disclosure of inside information.

Buy-back programmes and stabilization – Revisions have been made.

Accepted market practices – Will continue to be allowed by regulators under certain conditions and criteria.

Market soundings – A framework for disclosures of inside information in the course of market soundings will be put in place.

Insider lists – All issuers will need to maintain a list of all persons in their firm who have access to inside information. In SME growth markets this list may be drawn up when the regulator makes a request.

Suspicious transaction and order reports (STORs) – The existing obligation will be extended to include orders as well as trades as well as an obligation for trading venues to submit STORs.

Managers’ transactions – Persons discharging managerial responsibilities within issuers (PDMRs) and persons closely associated with them must notify of personal transactions in the issuer’s financial instruments. The issuer must make this information public within three business days

Investment recommendations – Must be objective and any conflicts of interest disclosed

Whistleblowing – Regulators and firms must have the ability to accept whistleblowing notifications

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