On 28 January 2016, ESMA published a paper consulting on a number of draft guidelines falling under a fraction of the Market Abuse Regulation (MAR). This consultation paper was based on a previous discussion paper, issued by ESMA on 14 November 2013.
In particular, the paper covers the mandates placed on ESMA to produce guidelines addressed to “persons receiving market soundings” (MSR) and “legitimate interests of issuers to delay inside information and situations in which the delay of disclosure is likely to mislead the public”, under article 11.11 and 17.11 of MAR respectively.
These 9 proposed guidelines are open for comment until 31 March 2016. ESMA aims to finalise both sets of guidelines and publish a final report by early Q3 2016 – just in time for when MAR takes effect in Member States across the EU on 3 July 2016.
In a previous article, we discussed the interdependencies that the new MAR holds with other regulations. In particular MiFID II, the Fair and Effective Markets Review (FEMR) and the Senior Managers Regime (SMR) were noted as those with significant interdependencies with MAR.
What is ‘market sounding’?
Starting off with the fundamentals, the definition of the term ‘market sounding’ was given in article 11.1 of MAR, as “a market sounding comprises the 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 by:
- an issuer;
- a secondary offeror of a financial instrument, in such quantity or value that the transaction is distinct from ordinary trading and involves a selling method based on the prior assessment of potential interest from potential investors;
- an emission allowance market participant; or
- a third party acting on behalf or on the account of a person referred to in point 1, 2 or 3.”
Although the provision of legal requirements governing ‘market sounding’ is a novel idea for the majority of EU Member States (only France currently has a domestic market sounding regime in place), the concept itself is not new and the regulation provides a formal approach based on what is considered as ‘normal practice’ today.
Even so, the practice of market sounding has been given a ‘safe harbour’ under MAR, whereby, providing that certain conditions are met, a market sounding will be considered as part of a “normal course of a person’s employment and therefore not constitute the improper disclosure of information”.
Key ‘market sounding’ requirements
Both the regulation on market abuse and the draft technical standards on MAR detail a number of legal prescriptions governing the practice of ‘market sounding’. Some of the key requirements are detailed below.
Prior to conducting a market sounding, a Disclosing Market Participant (DMP) must:
- Assess whether the market sounding will involve the disclosure of inside information and what information will need to be disclosed to potential investors
- Make a written record of its conclusion, which will have to be provided to the competent authority upon its request.
Before making the disclosure, the DMP is required to:
- Obtain the consent from the MSR to receive inside information
- Provide a ‘standard set of information’ (set out in the draft technical standards) to potential investors
- Inform the MSR that they are prohibited from using that information, or attempting to use that information, by:
- Acquiring or disposing of, for their own account or for the account of a third party, either directly or indirectly, financial instruments relating to that information or
- Cancelling or amending an order, which has already been placed, regarding a financial instrument to which the information relates
- Inform the MSR that by agreeing to receive the information they are obliged to keep the information confidential.
ESMA also was mandated to issue guidelines addressed to MSRs. In the wake of the FCA’s thematic review on asset management firms and the risk of market abuse in the UK, many buy-side firms may already satisfy a number of ESMA’s proposed guidelines. However, firms will still have to ensure that they have policies in place to fulfil the specified requirements.
The 9 proposed guidelines
In particular, ESMA was requested, under article 11.11 of MAR, to provide guidelines on:
- The factors that MSRs are to take into account when information is disclosed to them as part of a market sounding, in order for them to assess whether the information amounts to inside information
- The steps that MSRs are to take if inside information has been disclosed to
- The records that MSRs are to maintain.
To fulfil their obligation, ESMA recently published their consultation paper asking for feedback on their 9 guidelines addressed to MSRs.
A summary of each guideline is provided below.
- Designated persons or contact point within the MSR entitled to receive market soundings
Where the MSR designates a specific person or a contact point to receive market sounding, the MSR should ensure that that information is made available to the DMP.
- Communicating the wish not to receive market soundings
Once addressed by a DMP, the MSR should notify it in the case where they do not wish to receive future market soundings in relation to either all potential transactions or particular types of potential transactions.
- MSR’s assessment as to whether they are in possession of inside information as a result of the market sounding and as to when they cease to be in possession of inside information
MSRs should independently assess whether they are in possession of inside information as a result of the market sounding. Taking into consideration all relevant information available to them, including the information obtained from DMPs and other sources.
Furthermore, MSRs should independently assess whether they are still in possession of inside information taking into consideration all information available to them, including the information obtained from the DMP and other sources.
- Discrepancies of opinion between DMP and MSR
If the MSR assesses, in contradiction to the DMP, that they are in possession of inside information. The MSR should:
- refrain from informing the DMP of the discrepancy if the different assessment is due to the MSR being in possession of other information than that received from the DMP
- inform the DMP of the discrepancy if the different assessment is based exclusively upon the information that the MSR received from the DMP.
The same steps should be followed if the MSR receives a notification from the DMP that the information communicated in the course of the market sounding ceased to be inside information and the MSR disagrees with the DMP’s conclusion.
- Internal procedures and staff training
The MSR should establish, implement and maintain internal procedures to:
- Ensure information received in the course of the market sounding is communicated internally only through pre-determined reporting lines and on a need-to-know basis
- Ensure that the function or body entrusted to assess whether the MSR is in possession of inside information as a result of the market sounding is clearly identified and composed of trained staff
- Manage and control the flow of inside information arising from the market sounding within the MSR and its staff.
The MSR should ensure that staff receiving and processing the information in the course of the market sounding are properly trained on the relevant internal procedures and on the prohibitions arising from being in possession of inside information.
- List of MSR’s staff that are in possession of the information communicated in the course of the market soundings
For each market sounding, a MSR should draw up a list of the persons, working for them, that are in possession of the information communicated in the course of the market soundings.
- Assessment of related financial instruments
Where the MSR has assessed that they are in possession of inside information, as a result of a market sounding, the MSR should identify all issuers and financial instruments to which the inside information relates.
- Written minutes or notes
Where, in accordance with article 6.2 of the RTS on Market soundings, the DMP has drawn up written minutes or notes of unrecorded meetings or unrecorded telephone conversation, the MSRs should:
- Sign these minutes or notes where they agree on the content
- Where they do not agree on the content of the minutes or notes drawn up by the DMP, MSRs must provide the DMP with their own version of the minutes or notes, which must be signed within five working days after the market sounding.
9. Record keeping
MSRs should keep records in a durable medium that ensures both accessibility and readability for a period of five years of:
- Notifications referred to under point 2
- Assessments referred to in point 3 and the reasons thereof
- Discrepancy of opinion referred to in point 4
- Procedures referred to in point 5
- Lists referred to in point 6
- Assessment of related instruments referred to in point 7.
It should be noted that these also take into account the draft RTS and ITS on market soundings submitted to the European Commission on 28 September 2015 for adoption. Therefore, these guidelines may have to be reviewed again following any changes made to the draft RTS and ITS (in addition to any responses received from this consultation).
Whilst this regime aims make it easier for Competent Authorities to trace leaks of information, the enhanced level of prospective scrutiny may also increase the regulatory risks for both individuals and firms. This is not only in terms of information being inappropriately disclosed and/or used, but also from a systems and controls perspective. In light of this, the new regime may necessitate practical changes for investment advisory and banking firms, in particular.
But … market sounding constitutes just a fraction of the MAR. Reading this article, you would be forgiven for forgetting that the new market abuse regime has been extended to a cover a number of additional markets and financial instruments, including bonds, commodities and derivatives, for which market participants are still awaiting further clarification. In particular, it is thought that ESMA is currently preparing a consultation paper on a third set of guidelines required under MAR, which relates to the information expected or required to be published in relation to commodity derivatives.
As mentioned previously, there are a number of interdependencies between MAR and MiFID II and this topic is currently key to discussions taking place within our MiFID II Implementation group. To keep up to date with the latest regulatory developments, make sure you subscribe to our alerts.