Countdown to the new Market Abuse Regime
The new EU Market Abuse Regulation (596/2014/EU) (MAR) comes into force across EU Member States on 3 July 2016. Set out below are two opinion pieces on this development. First, from a regulatory perspective, Damian Carolan, Etay Katz and Oonagh Harrison outline concerns about the regime's scope. Jaya Gupta and Anne Kirkwood assess what market participants can expect between now and the implementation date.
Scope should be a real concern
When the European Parliament announced that it would take three months to scrutinise the European Commission's technical standards on topics such as buybacks, stabilisations and accepted market practice, it was clear that much of the granular detail of the new regime would not be finalised until moments before the requirements need to be complied with. Given the new layer of detailed obligations and processes that firms and issuers will need to comply with as a result of the proposed Level 2 measures, this delay is particularly unwelcome.
Firms are grappling with significant changes to processes, procedures and IT system capabilities (some of which are considered in our article on page 24); however, practical concerns around identifying which instruments are within scope remain a key issue.
The expanded regime
Since the adoption of the EU Market Abuse Directive (MAD) in 2003, the financial markets have seen both the creation of new forms of financial instruments and the emergence of new trading platforms. A key aim of the new regime was to extend the scope to reflect these changes, adapting the rules to reflect the new technologies and behaviour.
Under MAD, only securities admitted to trading on a regulated market, or for which a request for admission to trading has been made, are caught. MAR expands the scope to also include financial instruments that are:
traded on or admitted to trading on a multilateral trading facility (MTF) (or for which a request has been made); or
traded on the new trading venue category of organised trading facilities (OTF) (most likely from January 2018 when MiFID II is anticipated to go live). An OTF is a multilateral system that is not a regulated market or MTF, whereby multiple third-party buying and selling interests in bonds, structured finance products, emission allowances
or derivatives are able to interact in a way that results in a contract. Equities are not permitted to be traded through an OTF.
These changes represent a significant expansion and there is a real concern over how firms and market participants will identify in-scope instruments. While Article 4 of MAR ensures that the European Securities and Markets Authority (ESMA) will maintain a list of the relevant financial instruments, this list will not be definitive. The list is also likely to be extensive – there is anticipated to be a proliferation of trading venues for a broad range of fixed income and derivatives products both before and after MiFID II goes live.
Being unable to confidently identify in-scope instruments is particularly problematic in light of the revised wording in Article 2(1)(d) of MAR. This limb extends the regime to any related financial instrument traded over-the-counter, whose price or value depends on or has an effect on the price or value of a financial instrument traded on any trading venue within scope of MAR (including, but not limited to credit default swaps and contracts for difference).
In relation to market manipulation, MAR extends the prohibition to attempted manipulation and behaviour that amounts to:
cross-market manipulation, that is transactions in the derivatives markets that can be used to manipulate the price or value of commodities on the underlying spot markets, and transactions in the spot markets that can be used to manipulate the derivatives markets; and
the manipulation of the calculation of a benchmark – this will include knowingly or negligently providing false or misleading information or inputs for the calculation or any other behaviour that amounts to a manipulation of the calculation.
MAR also extends the scope of the regime to capture emission allowances.
In relation to instruments not traded on a regulated market (or, under MAR, MTF or OTF), the words "depends on" have been considered and understood under the current regime; however, under MAR it is unclear how firms or market participants are expected to assess where an instrument "has an effect on the price or value of" an in-scope financial instrument. For example, will this affect loans where the borrower issued listed bonds or shares, unlisted bonds where the issuer has junior listed bonds, or correlated stocks?
The changes introduced in relation to the market manipulation prohibition in order to capture cross-market manipulation refer to any financial instrument, not just derivative contracts or instruments. Being able to develop a coherent process and policy for identifying where a spot commodity contract transaction or order affects a financial instrument (and vice versa) is likely to be problematic for market participants.
These issues are exacerbated by the extra-territorial impact of the market abuse regime – the prohibition of market abuse will apply to acts and omissions, irrespective of whether they are carried out inside or outside the EU, and regardless of whether they take place on a trading venue. Uncertainty as to which instruments fall within the regime may cause certain market participants to inadvertently fall within the ambit of the regime.