Since the financial crisis, there has been an increased focus on tackling market abuse. As of March this year, the FCA had 49 cases market abuse cases open and, in 2014, 60+ market abuse cases were on their books. In terms of criminal convictions, three were secured for insider dealing and nine confiscation orders against individuals were issued. Despite the majority of the cases not concluding in a public outcome, the numbers demonstrate the FCA’s attitude towards market abuse is more focused than prior to the crisis.
From 3 July 2016 onwards, the market abuse regime will increase in scope and increase reporting standards. The Market Abuse Regulation (MAR) and Market Abuse Directive II (MAD II) will replace the current Market Abuse Directive (MAD). This change will broaden and strengthen the market abuse surveillance landscape of the EU and replace the UK’s Financial Services and Market Act 2000, whilst trade and transaction rulebooks and corporate governance regimes will be rewritten.
The scope of instruments covered by the market abuse regime will increase to cover, not just regulated markets, but also MTFs and OTFs, recast by MiFID II. This will increase the number of market participants covered and financial instruments traded.
As a result, there are concerns relating to which financial instruments are within scope, and market participants are worried about inadvertently straying into an area constituting market abuse. It is intended that ESMA will publish a list of relevant financial instruments, however, it should be noted that this list is not definitive and market participants should make their own cautious judgement before undertaking market practice.
Accepted market practice (AMP)
MAR has extended the scope of what is considered market abuse. AMPs may cover any financial instrument covered by MAR. Only a national competent authority can allow for the establishment of an AMP.
Importantly, whilst an AMP may be established in the Member State where the national competent authority has granted it, if you want to undertake that market practice elsewhere within the EU, you will need to gain permission for it to be an AMP from that corresponding competent authority.
Market sounding under MAR now follows a set procedure and formalises a system that was implemented in the non-formalised pre-MAR. The disclosure of inside information for market sounding purposes will be permissible if a number of procedural conditions are met. A person making the disclosure must consider whether the market sounding will involve disclosure of inside information and make a written report detailing conclusions and the reasoning behind such conclusions.
The consent of the recipient to being made an insider must also obtained and the insider must be informed of the restrictions that this will involve. The person making the disclosure will also need to maintain a detailed record of all this and must notify the recipient when the information ceases to be inside information.
Whilst most of this will already be standard market practice, it is likely that firms will need to increase, monitor and record detailed communications relating to their market sounding activities.
MAR imposes a shorter timeframe for reporting and publishing managers’ transactions. Under the current regime, managers must disclose transactions entered into to the company and to the regulator. This disclosure obligation will extend what is transacted and disclosure will be required within three business days, as opposed to the current five. Additionally, a mandatory close period will be imposed where managers cannot enter into transactions for 30 days prior to interim and end of year results.
The most hotly debated area of the new regulation has been insider dealing, where those concerned have found it difficult to find a mutual understanding on what the definition of insider dealing should be.
One significant aspect of the definition is the meaning of “significant effect on the price”. This is further defined to mean information that a reasonable investor would be likely to use as part of the basis of his investment decision. Equating the reasonable investor test with the “significant effect on price” creates confusion and difficulties, as they are clearly two different tests.
Abusive algorithmic and high-frequency trading will be specifically forbidden under the Market Abuse Regulation. Placing, modifying or cancelling orders with the intention of disrupting or delaying a market’s orderly functioning, and the entering of orders that will result in the overloading or destabilisation of the order book will be strictly forbidden.
Two high profile cases in the UK demonstrate the FCA’s prosecutorial power and zealousness to erase market abuse in the market. Michael Coscia, a high-frequency trader based in the US, was fined by the FCA for market abuse, in relation to oil futures. In addition, he was subject to enforcement action by the CFTC. A previous high profile case was in 2011, when the FCA took enforcement against a Canadian company, formally known as Swift Trade, for manipulating the market using layering techniques.
In the wake of the LIBOR scandal, a new prohibition on manipulating the calculation of a benchmark has been added to MAR. In the UK, the prohibitions have been in effect since 1 April 2013.
The FCA has been explicitly clear about cracking down on benchmark manipulation and has vocalised its disappointment at the slow pace the EU Benchmark Regulation agreement and implementation.
The case of Tom Hayes demonstrates the FCA’s no-nonsense attitude towards this particular type of market abuse – he was sentenced to 14 years imprisonment – also underlining the increased emphasis on personal liability.
The new Market Abuse Regulation formalises and introduces new procedures and rules governing and countering market abuse. The clear message from the authorities is that there is a no-nonsense line being adopted, along with unprecedented individual responsibilities.
In combination with the rules set by the Senior Managers Regime, and suggestions from the Fair and Effective Market Review, MAR will introduce a new standard for all to either follow or to suffer very severe consequences.