ESMA has just recently issued a consultation paper on a portion of MAR, which comes into force in July this year. Central to this complicated consultation is the rules around market participants involved in a securities transaction where the information they are given may, or may not constitute inside information.
As a bit of background to the market abuse regulations. ESMA oversaw the implementation of the original Market Abuse Directive (MAD) in 2005, resulting in an EU-wide regime and framework for establishing a proper flow of information to the market. In mid 2014 this regulation was updated, resulting in MAR coming into force on July 3rd this year. MAR aims to further enhance market integrity and most importantly, investor protection applying to trading on regulated stock exchanges and over-the-counter platforms. The intention is that MAR strengthens the MAD framework by extending its scope to new markets and trading strategies by introducing new requirements.
Article 11(1) of MAR regards the communication of information before the announcement of a transaction which intends to gauge the potential interest of investors and the conditions relating to it (for example size and/or pricing). It provides for ESMA to issue guidelines to market participants receiving market soundings (MSRs) from Disclosing Market Participants (DMPs), outlines how issuers may legitimately delay inside information and describes situations in which the delay of disclosure is likely to mislead the public. Moreover, MAR is designed to regulate the way market soundings are conducted, including the transmission of inside information. Of course, not all market soundings involve the disclosure of inside information. In a discussion paper issued in November 2015, ESMA asks the market to respond to its proposals by the end of March this year.
The consultation paper is particularly confusing and convoluted but here are few relevant points we at Objectivus deem important
It is suggested MSRs might want to designate a person to receive these market soundings and determine whether the MSR should agree to receive the market sounding.
Article 11(4) states that, when a DMP discloses inside information to an MSR this is deemed to have been made in the normal course of the exercise of a person’s employment, profession or duty, and therefore doesn’t constitute market abuse. ESMA have proposed that MSRs should conduct their own assessment as to whether the information they have received in the course of the market sounding is inside information or not and then record their assessment. It is also proposed in the discussion paper that the MSR should forward any supporting information that is in the public domain to the DMP.
ESMA believes where the MSR assesses it is not in possession of inside information contrary to the DMP’s assessment it may disregard the prohibitions arising from being in possession of inside information. But, should the MSR’s assessment be wrong and they are in fact in possession of inside information they can be pursued by the relevant competent authority for breaching the provisions on insider dealing and unlawful disclosure of inside information. This will certainly encourage firms in receipt of such information to err on the side of caution and deem it to be inside. It is also proposed that records of any discrepancy of opinion be kept for 5 years.
All MSR’s staff who are entrusted to receive and process the information received as a result of the market sounding must be properly trained on the relevant internal procedures and on the prohibitions arising from being in possession of inside information. The consultation paper asks if the market agrees with the proposal of internal procedures and staff training and whether the guidelines need to be more detailed and specific about the internal procedures to prevent the circulation of inside information. ESMA also proposes for each market sounding MSRs should draw up a list of the persons working for them who are in possession of the information communicated.
The market has until the end of March to put forward its comments and we expect the regulator to respond by the end of September.
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