Changes to the scope of MAR – Instruments and Behaviors
On 3 July 2016 new Market Abuse rules will come into force across Europe, under the Market Abuse Regulation (MAR).
The regulation represents an updating and broadening to the existing Market Abuse regime (MAD), in force since 2003. The overall objective is to increase market integrity and investor protection in a way that is consistent across the EU to ensure a level playing field.
Over the next few weeks we will be updating on three areas of interest:
- The extent to which MAR represents a broadening of scope to the existing regime, capturing new instruments and behaviours
- Impact on the Suspicious Transaction Reporting regime, including surveillance requirements
- The introduction of detailed regulation of Market Soundings.
Today we start by examining the scope of MAR.
Scope – Instruments
At a high level both MAD and MAR seek to address two key risks to markets – insider dealing and market manipulation.
Both of these behaviors represent abuse of securities and one of the key updates within MAR is to the definition of what securities are captured by the regime. This goes beyond instruments traded on traditional exchanges (“regulated markets”) to any financial instrument traded on Multilateral Trading Facilities (MTFs) and, come the introduction of MiFID II in January 2018, Organised Trading Facilities (OTFs) as well. Additionally, any instrument that derives its value from any of the above is also captured.
In practice in the UK the impact may not be that great as many such instruments were captured already as a “related investments” under FSMA 118A(1)(iii). But a good example of an instrument that will be newly captured would be an unlisted bond, not traded on any regulated market, but traded on an MTF.
Scope – Behaviours
The definition of inside information is broadly unchanged under MAR, but the new regulation does scope in some additional behaviours. First, MAR states that the use of inside information to amend or cancel an order qualifies as insider dealing. Second, if a person recommends that someone trades in securities when the person making the recommendation has inside information about that security, this will also count as insider dealing.
The core behaviours prohibited under MAD are carried over into MAR, i.e. prohibition on misleading or deceiving the market as to the true value of an instrument, whether through trades and orders or through dissemination of false information. However, the manipulation offence has been extended to capture attempted manipulation. Additionally, manipulation of Benchmarks, and in some situations spot commodities, are now in scope of the manipulation offence. MAR also clarifies certain behaviours as constituting market manipulation, including certain activities by HFTs and algorithmic traders. These include deliberate disruption of a trading venue, destabilizing the order book and creating a false impression so as to initiate or exacerbating a trend
One notable impact is that MAR imposes an extraterritorial reach. Outside of the EU, non-EU parties may be captured by the regime—even if they are trading securities which are primarily listed and traded outside of the EU—if those securities also happen to be traded on an MTF or OTF in the EU. So for example, abusive behaviors by US firms through US firms on US listed securities could be captured if that security is also traded on an MTF or OTF in Europe
Next: MAR’s impact on the Suspicious Transaction Reporting regime, including surveillance requirements
Charles Hastie is Regulatory Head at Clutch Group, working out of the company’s London office. Charles harnesses his long-standing regulatory investigation experience to develop strategic solutions for Clutch’s financial services clients. He establishes ongoing liaisons with key opinion leaders, government officials, and regulatory bodies to ensure that significant developments in the field are monitored and relayed to clients. For more information, contact Charles at firstname.lastname@example.org.