On July 3, 2016 the new Market Abuse Regulation comes into effect throughout Europe, pursuant to 2014 legislation. The member states have transposed the MAR into national law.
Stefan Hendrickx, of the TABB Forum, recently looked at the “race to the MAR deadline” from the point of view of the buy side in Europe’s financial markets. He made the following points:
- Buy-side firms no longer have the luxury of reliance on their brokers to do market surveillance for them. They also have to understand that their brokers will have to flag suspicious transactions with the regulator directly, without notifying said buy-side firm. This is a consequence of the new “Suspicious Transaction and Order Reports” (STORs) regime.
- Indeed, the buy side will have to cope with the challenge of storing the analyses of suspicious orders and executions. A mere audit trail of executions will not suffice.
- Guidelines established by the European Securities and Markets Authority require that surveillance systems include “software capable of deferred automated reading, replaying, and analysis of order book data on an ex post basis.”
Extending the Scope of the Existing System
Let’s back up a bit. In late January, ESMA issued draft guidelines designed to clarify the implementation of MAR. It described the underlying goal of MAR as that of strengthening the existing market abuse framework by “extending its scope to new markets, platforms and trading behaviors.”
Insider trading is one key concern of ESMA under the heading “market abuse.” Some of it is, for market participants tired of the different layers of regulation involved, good news. In particular, ESMA has shortened the list of information that has to be recorded on the template ‘insider’ list. Personal or professional email addresses and employment contract dates are off the list.
The original consultation paper about MAR, back in 2014 suggested that STORs would have to be submitted to authorities “without delay.” As one might expect this gave rise to further discussion. How immediately is immediately? There was some talk of a two week deadline. But ESMA’s Final Report, in September of last year, backed away from this somewhat saying that two weeks is nothing other than a deadline and firms should consider what is appropriate case by case.
Market Soundings
The role of a “market sounding” has become integral to the concern over insider trading. A market sounding is a “communication of information, prior to the announcement of a transaction, in order 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.” The question, them is : does that fact that a particular party has engaged in a market sounding itself constitute inside information for those on the receiving end of that communication? If the answer is “sometimes yes, sometimes no,” then: what circumstances turn a sounding into inside information?
The whole idea of regulating “market soundings” is something of a novelty on the European level. Previously, only France had a domestic market-soundings regime.
The MAR regime offers a safe harbor. If a disclosing market participant (DMP) is acting under a general mandate from an issuer (the Market Sounding Beneficiary or MSB) and questions investors to gauge appetite for a corporate transaction in the pursuit of that mandate, that will not be considered a market sounding at all.
When a DMP does engage in a market sounding, though, it must now follow an established process including:
- An assessment of what information has to be supplied to the recipients (given a background obligation not to disclose unnecessary information);
- Consent from the MSR, and a listing of which investors have said they do or do not want to be sounded, either in general or in connection with particular types of tranactions;
- A standard set of information that has to be provided to MSRs by DMPs.
All these requirements are hereafter subject to strict record keeping mandates. Further, as Ashurst London has concisely observed, “If the market sounding can be done over a recorded line, it should.”
This is all a separate matter from MiFID II, though compliance officers necessarily have to see them as of a piece. As HSBC has put it, “It is hoped that MiFID II will ensure that all types of organized trading are regulated [while] MAR will apply market abuse rules to all organized trading.” MAR amends the previous Market Abuse Directive (MAD).