Market Abuse Directive (MAD I & II) and Market Abuse Regulation (MAR)

Market Abuse Directive (MAD I & II) and Market Abuse Regulation (MAR)

Overview

Background

Published in 2003, the EU Market Abuse Directive (MAD) sought to implement an EU-wide market abuse regime. But since the implementation of that directive, the increasingly global nature of financial markets and the development of new trading platforms meant that MAD was soon outdated.

So therefore due to those issues and the manipulation of certain benchmarks such as LIBOR (London Interbank Offered Rate) it was decided during a scheduled review that the development of a new legislation was required.

In 2014 the Market Abuse Regulation (MAR) and the Directive on Criminal Sanctions for Market Abuse (CSMAD and, together with MAR, MAD II) were published in the Official Journal. MAR went live on the 3rd July 2016.

MAR seeks to enhance and harmonise the EU regime on market abuse. It increases the scope of existing offences and has introduced new offences such as attempted insider dealing, manipulation of benchmarks and commodities and has enhanced requirements on firms operating in the EU financial markets. MAR applies directly in each EU member state without requiring states to produce laws that implement MAR's provisions. CSMAD requires each Member State to implement legislation to ensure that market abuse is a criminal offence which can be effectively punished. Together, MAD II seeks to improve confidence in the integrity of the European financial markets.

How does MAR interact with MiFID II?

MiFID II is the recast markets in financial instruments directive, comprising a directive (Directive 2014/65/EU) and a regulation (Regulation 600/2014/EU). Broadly, MiFID II updates and extends the regulation of financial services in Europe.

MAR makes multiple references to MiFID II. While the two pieces of legislation are intended to interact, they have always been on staggered implementation timetables. Implementation of MiFID II has been delayed by 12 months to 3 January 2018, MAD II has an implementation date of 3 July 2016 with no proposal for delay.

Until MiFID II is implemented, MAR references to MiFID II are to be read as references to MiFID I, using the correlation table set out in Annex IV to MiFID II. The effect of this is that the scope of MAD II will broaden in January 2018 as MiFID II will bring a range of additional financial instruments into scope of MAD II.

ESMA Q&A

On 13 July 2016 ESMA updated their Market Abuse Regulation Q&A

Last updated: 1 August 2016

Requirements and exemptions

The adoption of the Regulation means that:

  • Existing market abuse rules have been broadened to include abuse on the electronic trading platforms that have proliferated in recent years
  • Abusive strategies enacted through high frequency trading are clearly prohibited
  • Those who manipulate benchmarks such as LIBOR will be guilty of market abuse and face tough fines
  • Market abuse occurring across both commodity and related derivative markets is prohibited, and cooperation between financial and commodity regulators has been reinforced
  • The possibility of fines of at least up to three times the profit made from market abuse, or at least 15% of turnover for companies. Member-States could decide to go beyond this minimum.
  • Where a communication constitutes an ‘investment recommendation’ as defined by the Market Abuse Regulation, certain disclosures must be provided. These disclosures include statements as to certain potential conflicts of interest and as to changes to previous recommendations.

Adoption of the Directive means that:

  • There are common EU definitions of market abuse offences such as insider dealing, unlawful disclosure of information and market manipulation
  • There is a common set of criminal sanctions including fines and imprisonment of four years for insider dealing/market manipulation and two years for unlawful disclosure of inside information
  • Legal persons (both individuals and companies) will be held liable for market abuses
  • Member States need to establish jurisdiction for these offences if they occur in their country or the offender is a national
  • Member States need to ensure that judicial and law enforcement authorities dealing with these highly complex cases are well trained

Exemptions

The main exemptions from MAR are:

  • Trading in own shares in buy-back programmes. Full details of the programme must be disclosed prior to the start of trading; trades must be reported to the relevant competent authority as being part of the programme and subsequently disclosed to the public; and adequate limits regarding price and volume must be respected (Article 3(1)).
  • Trading in own shares for stabilisation of a financial instrument. Stabilisation must be carried out for a limited period; relevant information about the stabilisation must be disclosed; and adequate limits regarding price must be respected (Article 3(2)).

Removals

The definition of market manipulation has been extended to include many types of behaviour. Specifically, it refers to behaviour related to spot commodity contracts as well as financial instruments. The potential for establishing a defence for this behaviour based on accepted market practices (AMPs) is to be removed, subject to a twelve month transitional period for previously notified AMPs.

Additionally, a number of defences and safe harbours that appeared in the Recitals to the original MAD have disappeared in the new Market Abuse Regulation.

Last updated: 2 August 2016