Market Abuse Regulation (MAD II) Old Problems, New Markets Alex Fahy and Miles Kellerman May 2016
Markets and misconduct Diversification and Proliferation 2
Old problems The Commission s has been consulting on this since 2010. In 2010, the commission highlighted some of the problems it was finding in relation to the variation of approach across the continent; Authorisation Management Sanction Penalties Definition 6 Member States - no possibility to withdraw an individual s authorisation for Market abuse 15 Member States - no ability to disqualify/dismiss management and/or supervisory body in cases involving market manipulation 4 Member States - maximum fines of 200 000 euro or less A concept that encompasses unlawful behaviour in the financial markets and, for the purposes of this Regulation, it should be understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation What it amounts to is keeping new markets clean The purposes of MAR are; o To harmonise standards across the EU o To define acceptable market conduct 3
Scope - Overview MAD II and MAR represent an expansion of the scope of market abuse regulation Activity MAD (Current UK MAR) Behaviours (for some behaviours orders are specifically included, for others only trades are caught) EU MAR Trades, Orders & Behaviours Securities Qualifying investments Securities, benchmarks, commodities (spot) Venue Prescribed Markets Exchanges, MTFs, OTFs and Auction Platforms 4
Scope Activities and behaviours Type of Behaviour Insider Dealing Unlawful Disclosure Manipulating Transactions Manipulating Devices Dissemination Misleading Behaviour Benchmark Manipulation Key changes qualifying investments replaced by financial instruments (not spot) Specifically includes cancellations and amendments Knowledge test is now knows or ought to know Applicable to persons not just insiders Entering into a transaction, placing a trade or any other behaviour 'Entering into a transaction, placing a trade or any other behaviour qualifying investments > financial instrument, a related spot commodity contract or an auctioned product based on emission allowance No direct comparator in EU MAR But Any other Behaviour New - transmitting false or misleading information or providing false or misleading inputs or any other behaviour 5
The manipulation offences - Any other behaviour This new element has been explicitly included to catch misconduct relating to; o One product traded in multiple venues o An underlying financial instrument whose price or value affects a derivative ESMA refer variously to Cross-Market, Cross-Asset and Cross- Venue. ESMAs guidance illustrates; Cross-product o The manipulation of the price of a financial instrument traded in a regulated market in order to influence the price of a CDS Cross-venue o False indications of interests displayed in an electronic bulletin board on a specific financial instrument that is also traded in a regulated market o Key Takeaway Does your activity in one market or product have the potential to affect business in a related market or product 6
Inside information MAD I Definitions Precise typically relating to a specific event Price Sensitive capable of having an effect on price of a security Non-public not published or heavily rumoured 7
Insider trading Criminal Market Abuse Acting as a Prosecutor Civil Market Abuse Acting as a Regulator 8
Insider trading Area Current Incoming Knowledge Information obtained which he knows, or could reasonably be expected to know, is inside information Knows or ought to know Security Qualifying Investments Financial Instruments Act Dealing or attempting to deal Dealing, attempting to deal, amending or cancelling an order 9
Insider lists Over the Wall 10
Thematic findings Information barriers Employees need to understand their role in controlling information flows Firms and senior management had identified and considered the main risks but they were not doing enough to manage them We expect to see business heads acting in a supervisory capacity taking responsibility for controlling flows of information, with appropriate challenge and monitoring from the second and third lines of defence Firms should place the assessment of circumstances that could present heightened risks at the centre of their ongoing risk assessment 11
Insider lists Required Content Old Identity of each person having inside information Reason for being on list New Job title Work direct number National ID number D.o.B. Date list created/updated Date and Time information obtained Deal specific v General Date list created Reason Personal telephone no Home address 12
Market soundings The FCA has long been interested in regulating market soundings Conductor of market sounding Inside information Potential investor 13
Market soundings: The new requirements Conductors Obtain permission Keep records Provide documentation Recipients Evaluate information Keep records Train staff 14
Designating a market sounding recipient Group v. Individual: Should I assign the responsibility to an individual or an entire team? Training: Is my designated recipient(s) properly trained, and do they understand their responsibilities? Organisational Design: How do I ensure that the organisation of my firm ensures proper compliance with the market sounding regime? 15
Managers transactions Persons Discharging Managerial Responsibilities (PDMRs) Manager or Senior Executive of an Issuer that: 1. Has regular access to inside information; and 2. Has managerial decision-making power Associated Persons Spouse Dependent Children Relatives in the Household Trusts, Companies 16
Managers transactions: MAR requirements Threshold: 5,000 Reporting: three business days, concurrent PDMR/Associated Person to Firm Day 1 Day 2 Day 3 Firm to FCA Restrictions: 30 days prior to interim and year-end reports 17
Surveillance systems for detection of abuse 1. Market manipulation: past and present 2. Common manipulative trading practices 3. MAR s new requirements Surveillance systems Necessary capabilities Practical considerations 18
Market manipulation in the past Manipulation is as old as the markets themselves Until the 1960s, information about stocks was transmitted via ticker tape. Painting the tape manipulated the ticker to give the appearance of activity in the market The activity elicited a response, resulting in a change of price that could be taken advantage of 19
Manipulative trading practices outlawed by MAR Spoofing (one side of trade) Layering (two sides of trade) 20
Abusive behaviour by trading venues Market abuse can also be committed by trading venues 21
Systems for detection of abuse System for detection Training Suspicious transaction and order reports 22
Detection systems: Necessary specifications Analysis: each and every order and transaction inside and outside trading venues Alerts: notifies staff of potential abuse Playback: every analysis (and trade/order data) employed to investigate suspicious activity in the last five years, regardless of STOR submission 23
Detection systems: Practical considerations Will my system need to be automated? How do I set the correct parameters for my alerts? I m a small firm do I have the same requirements? 24
Takeaway questions Am I subject to MAR (II)? Yes No Ask yourself: Do I need to make any changes to my system or procedures? Relax and grab another bacon sandwich/ glass of wine What areas of my business pose a compliance risk? Are my employees properly trained and informed? 25