Regulation 596/2014 on market abuse ("MAR"), and Directive 2014/57/EU on criminal sanctions for market abuse ("CS MAD") were published in the Official Journal of the EU on 12 June 2014 and apply as of 3rd July 2016. Together, MAR and CS MAD are known as MAD II.
The existing Market Abuse Directive is repealed as of the effective date of the new Regulation. MAR has direct effect in all Member States and does not require any further legislation for it to have effect in national laws.
MAR aims at enhancing market integrity and investor protection. To this end, MAR updates and strengthens the existing market abuse framework by (a) extending its scope to new markets and trading strategies and (b) introducing new requirements and standards. The definition of financial instruments in MAR refers to the definition under MIFID II, which is very broad.
In addition, MAR does not limit its scope to financial instruments traded on regulated markets ("Regulated Markets") in the EU, but extends its requirements to financial instruments listed or traded on Multilateral Trading Facilities ("MTFs") and Organised Trading Facilities ("OTFs") and emission allowances, and to issuers who have made application for securities to be listed or traded on such markets.
ESMA published its technical standards ("TS") in September 2015 and these standards prescribe the detail of how MAR must be applied in all Member States. Further guidance will be provided by ESMA and relevant competent authorities over time.
For the purposes of this memorandum, we have focused on the impact of MAD II on investment funds and issuers of debt securities which are listed on the Irish Stock Exchange.
These changes will require issuers with securities listed on Regulated Markets, MTFs and OTFs in the EU, including the Main Securities Market ("MSM"), Global Exchange Market ("GEM") and Enterprise Securities Market ("ESM") of the Irish Stock Exchange, to carefully review the obligations under MAR and to adopt policies and procedures to ensure compliance with the new regulations before the 3rd July 2016 deadline.
The New European Market Abuse Regime
Expansion of Scope1
The scope of the market abuse framework has been extended to include MTFs and OTFs. MAR also covers trading on other financial instruments outside of those markets, whose price is dependent on the price of a financial instrument traded on a prescribed regulated market, MTF or OTF (e.g. contracts for difference and credit default swaps)2.
Notifications and List of Financial Instruments3
Competent authorities will be notified by exchanges, MTFs and OTFs of all financial instruments trading on their venue and all applications to list and delistings. Competent authorities will transmit such notifications to ESMA without delay and ESMA will publish this list of financial instruments, including identifiers, immediately upon receipt.
Exemption for Buy-Bank Programmes and Stabilization4
The prohibition on insider dealing and market manipulation will not apply to trading in own shares in buy-back programs or trading in securities for the stabilization of securities when certain conditions set down in MAR are met.
The definition of what constitutes inside information has been amended as follows6:
- "information of a precise nature, which has not been made public, relating directly or indirectly to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments;
- In relation to commodity spot derivatives, information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more such derivatives or relating directly to the related commodity spot contract, and which, if it were made public, would be likely to have a significant effect on the prices of such derivatives or related spot commodity contracts, and where this is information which is reasonably expected to be disclosed or is required to be disclosed in accordance with legal or regulatory provisions in the Union or national level, market rules, contract, practice or custom, in the relevant commodity derivatives markets or spot markets;7
- In relation to emission allowances or auctioned products based thereon, information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more such instruments, and which, if it were made public, would be likely to have a significant effect on the prices of such instruments or on the prices of related derivative financial instruments;
- For persons charged with the execution of orders concerning financial instruments, it also means information conveyed by a client and relating to the client's pending orders in financial instruments, which is of a precise nature, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments, the price of related spot commodity contracts, or on the price of related derivative financial instruments".
MAR specifies that information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or may reasonably be expected to come into existence, or an event which has occurred or may reasonably be expected to occur, and is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event, as the case may be, on the prices of financial instruments or related derivative financial instrument, the related spot commodity contracts, or the auctioned products based on emission allowances.
For the first time, MAR specifies that in the case of a protracted process that is intended to bring about, or that results in, particular circumstances or a particular event, those future circumstances or that future event, and also the intermediate steps of that process which are connected with bringing about or resulting in those future circumstances or that future event, may be deemed to be precise information8. Further, an intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfies the criteria of inside information.9
The "reasonable investor test" in relation to what is deemed to constitute inside information remains under MAR, as "information which a reasonable investor would be likely to use as part of the basis of his or her investment decisions".10
MAR provides that it is an offence to use inside information to buy or sell financial instruments. It is also an offence to disclose inside information to any other person, unless this is done in the normal course of a persons' employment, profession or duties11.
Recommending or inducing another person to transact on the basis of inside information amounts to unlawful disclosure of inside information12.
In a Consultative Paper issued in January 2016, ESMA considers examples of inside information. This paper is referenced under "Further Links" at the end of this memorandum. The results of the ESMA consultation are expected to be published in Q3 2016.
Disclosure of Inside Information13
Issuers of financial instruments that are admitted to trading on a Regulated Market, MTF or OTF must inform the public as soon as possible of inside information which directly concerns the said issuers. MAR provides that inside information must be announced without delay and in a manner which allows fast access and a complete, correct and timely assessment of the information by the public14.
Inside information may be announced either:
- Directly to a Regulated Information Service (RIS); or
- Indirectly to a RIS through the Companies Announcements Office of the ISE.
MAR now requires that an issuer shall post and maintain on its website for a period of at least 5 years, all inside information it is required to disclose publicly.
Delay in Public Disclosure of Inside Information15
MAR provides that an issuer may, under specific circumstances, delay the publication of inside information where:
- the immediate disclosure of the information is likely to prejudice the legitimate interests of the issuer;
- delay of disclosure is not likely to mislead the public; and
- the issuer is able to ensure the confidentiality of that information.
ESMA has stressed that for an issuer to be able to delay the disclosure of inside information, all of the above conditions have to be met.
The ESMA Consultation Paper sets out examples of what might constitute "legitimate interests" and "likely to mislead the public".
Where publication of inside information is delayed the issuer is required to maintain records of the:16
- identity of all persons with responsibility for the decision to delay the publication of the inside information;
- identity of the person making the notification – professional email and phone number
- date and time when the inside information first existed within the issuer;
- date and time of the decision to delay the publication of the information (incl. time zone);
- reasoning on each point (a), (b) and (c) above;
- manner in which compliance with confidentiality and the conditions for delay are monitored; And
- decisions relating to when public disclosure should be made.
The issuer must notify the relevant competent authority in writing as soon as possible after the inside information is made public of the delay in publication and provide a written explanation of the reason for the delay and how each of the above three conditions (a), (b) and (c) were met. Each competent authority shall determine whether it will request such notification as a rule or on a case by case basis. The position of the Irish competent authority, the Central Bank or Ireland ("Central Bank") has not yet been clarified.17
Issuers are expected to have in place a minimum level of organisation and a process to conduct a prior assessment of whether a piece of information is inside information, whether its disclosure needs to be delayed, and for how long.18 Throughout the period of delay, the issuer should ensure that the conditions for delay are constantly fulfilled, particularly confidentiality, and records of such monitoring should be maintained. Where publication has been delayed, and confidentiality can no longer be assured, information must be published without delay.19
The more people involved in the process and that know about the inside information, the more stringent the information barriers should be.20
It is likely that these procedures, together with the additional requirements for maintenance of insider lists, will focus issuers on whether information does in fact constitute "inside information" rather than erring on the side of caution.
MAR provides that a person shall not:22
- engage or attempt to engage in insider dealing;
- recommend that another person engage in insider dealing or induce another person to engage in insider deadline; or
- unlawfully disclose inside information.
A person who deals while in possession of inside information will be presumed to have used that information. The use of inside information to amend or cancel an order will also be considered insider dealing23.
The insider dealing provisions apply to any person who possesses inside information as a result of:
- being a member of the administrative, management, or supervisory bodies of the issuer or emission allowance market participant;
- having a holding in the capital of the issuer or emission allowance market participant;
- having access to the information through the exercise of an employment, profession or duties; Or
- being involved in criminal activities24.
The provisions also apply to any person who possesses inside information under circumstances other than those above where the person knows, or ought to know that it is inside information25. That person need not be connected with the listed issuer.
Where the person is a legal person, the requirements shall apply, to the natural persons who participate in the decision to carry out the acquisition, disposal, cancellation or amendment of an order for the account of the legal person involved.26
MAR includes provisions for legitimate behaviour when in possession of inside information, where that person has used that information and has engaged in insider dealing on the basis of an acquisition or disposal, including where effective procedures and controls can ensure that the person who made the decision or who may have influenced the decision to invest, was in possession of inside information.27
MAR recognises the need for market soundings and provides a carve-out for the general prohibition for such soundings – and prescribes new rules to gauge investor interest prior to announcement of transactions and maintaining appropriate records.
Prior to conducting a market sounding, the issuer must:
- specifically assess whether the market sounding will involve the disclosure of inside information;
- make a written record of its conclusion and the reasons for reaching it (and provide this written record to the competent authority upon request);
- obtain the consent of the person receiving the sounding to receive inside information;
- inform the person receiving the information that he is prohibited from using that information, or attempting to use it, by
- acquiring or disposing of, for his own account or for the account of a third party, directly or indirectly, financial instruments relating to that information; or
- cancelling or amending an order which has already been placed concerning a financial instrument to which the information relates; and
- inform the person receiving the market sounding that by agreeing to receive the information he is obliged to keep the information confidential.29
The disclosing issuer/market participant must make and maintain a record of all information given to the person receiving the market sounding, including the prescribed information given and the identity of potential investors to whom the information has been disclosed and the date and time of each disclosure. This must be provided to the competent authority on request.30
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1 Recital 8, Article 2
2 Provisions relating to OTFs, SME growth markets, emission allowances and auction based products shall not be applicable, and references to MiFID II shall be read to reference to the existing MiFID legislation, until 3rd January 2018, in response to the extension of MiFID II.
3 Recital 9, Article 4, TS 2
4 Article 5, TS 3
5 Article 7
6 Article 7(1)
7 ESMA will issue guidelines to establish a non-exhaustive list of information expected or required. See also AMP provisions under Article 13.
8 Article 7 (2)
9 Recital 16, Article 7 (3)
10 Recital 14, Article 7 (4)
11 Article 8(1)
12 Article 8(2)
13 Article 17, TS 7
14 Article 17
15 Article 17(4)
16 TS 233, 247
17 TS 7.3
18 TS 239
19 TS 242
20 TS 248
21 Article 8
22 Article 14
23 Recitals 23, 24, 25, Article 8(1)
24 Article 8(4)
25 Article 8(4)
26 Article 8(5)
27 Article 9
28 Recitals 34, 35,36, Article 11, TS 4
29 ESMA Technical Standards – Chapter 4
30 Recitals 32-36
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.