The Market Abuse Regulation (MAR) was adopted back in July. However, the key changes have yet to show up on many people’s radars. Whether this is because people aren’t aware of the changes, or because implementation will be largely principles-/outcomes-based, is unclear. But there are things for firms to do now, especially ahead of MiFID II implementation next year, or else risk some of the severe fines available to regulators.
There are now six offences recognised under MAR: insider dealing, improper disclosure, manipulating transactions, fictitious devices, dissemination and (of course) manipulation of benchmarks. The definition of insider dealing has also expanded significantly in a number of ways: Firstly, the number of instruments in scope will be significantly expanded once the definition of financial instruments under MiFID II is finalised. The full list will include all transferable securities, units in CIS, financial derivatives, commodity derivatives and emission allowances, meaning that few (if any) of firms’ businesses will be out of scope.
Secondly, an extended range of behaviour comes under the definition of insider dealing. Behaviour that can be punished now includes: attempted insider dealing, any behaviour having an effect on the pricing of products admitted to trading, bids in emission allowance auctions, and even amendments and cancellations of orders based on insider information (though not clear whether deciding to ‘hold’ securities could also qualify). The bottom line is that insider trading rules are spreading into all stages of the trade lifecycle bringing more functions and activities into scope. One consequence of this is that responsibility for identifying and preventing market abuse can no longer rest solely with the front office.
Lobbying has achieved some concessions from regulators, such as exemptions for buy-back programmes and stabilisation, a ‘legitimate business’ exemption for market makers, and the recognition of Chinese Walls (though firms will have to prove their effectiveness in any enforcement action). However, this means that firms have a significant amount of work to do to make sure they are able to benefit from these carve-outs and that their day-to-day activities are not at risk of being classed as market abuse!
Further new rules will be coming with MiFID/R, such as compulsory market abuse controls within algorithms, and the new Market Abuse Directive, which is due to be adopted once the MiFID II level 1 text is complete. Again, the impact here is that the back and middle offices will have to become regulators within their own firms, or face being made accountable for market abuse themselves. This is a fundamental shift from the current prevailing approach to anti-market abuse efforts within firms, and firms would do well to start preparing for the stricter regime before MiFID II takes over change teams’ lives in 2014.