Old Problems, New Markets

Market Abuse Regulation (MAD II)

Alex Fahy and Miles Kellerman

May 2016

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Markets and misconduct – Diversification and Proliferation

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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;

• 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

Authorisation 6 Member States - no possibility to withdraw an individual’s

authorisation for Market abuse

Management Sanction 15 Member States - no ability to disqualify/dismiss management

and/or supervisory body in cases involving market manipulation

Penalties 4 Member States - maximum fines of 200 000 euro or less

Definition “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”

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Scope - Overview

• MAD II and MAR represent an expansion of the scope of market abuse regulation

MAD (Current UK MAR) EU MAR

Activity Behaviours (for some

‘behaviours’ orders are

specifically included, for

others only trades are

caught)

Trades, Orders &

‘Behaviours’

Securities Qualifying investments Securities, benchmarks,

commodities (spot)

Venue Prescribed Markets Exchanges, MTFs,

OTFs and Auction

Platforms

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Scope – Activities and behaviours

• Key changesType of

Behaviour

• ‘qualifying investments’ replaced by ‘financial instruments’ (not spot)

• Specifically includes cancellations and amendments

• Knowledge test is now ‘knows or ought to know’

Insider Dealing

• Applicable to ‘persons’ not just insidersUnlawful

Disclosure

• Entering into a transaction, placing a trade ‘or any other behaviour’Manipulating Transactions

• 'Entering into a transaction, placing a trade ‘or any other behaviourManipulating

Devices

• ‘qualifying investments’ > ‘financial instrument, a related spot commodity contract or an auctioned product based on emission allowance’

Dissemination

• No direct comparator in EU MAR – But… ‘Any other Behaviour’Misleading Behaviour

• New - ‘transmitting false or misleading information or providing false or misleading inputs… or any other behaviour ‘

Benchmark Manipulation

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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-venueo ‘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

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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

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Insider trading

Criminal Market Abuse

‘Civil’ Market Abuse

Acting as a

Prosecutor

Acting as a

Regulator

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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’

SecurityQualifying

Investments Financial

Instruments

ActDealing or

attempting to deal

Dealing, attempting to deal, amending or cancelling an order

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Insider lists – ‘Over the Wall’

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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

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Insider lists – Required Content

Old New

Identity of each

person having

inside information

Job title Work direct number

Reason for being

on list

National ID number D.o.B.

Date list

created/updated

Deal specific v General Personal telephone no

Date and Time

information

obtained

Date list created Home address

Reason

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Market soundings

The FCA has long been interested in regulating market soundings…

Conductor

of market

sounding

Potential

investor

Inside

information

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Market soundings: The new requirements

Conductors

Obtain permission

Keep records

Provide documentation

Recipients

Evaluate information

Keep records

Train staff

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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?

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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

SpouseDependent

Children

Relatives in the

HouseholdTrusts, Companies

Associated Persons

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Managers’ transactions: MAR requirements

Threshold: €5,000

Reporting: three business days, concurrent

Restrictions: 30 days prior to

interim and year-end reports

PDMR/Associated Person to Firm

Firm to FCA

Day 1 Day 2 Day 3

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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

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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

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Manipulative trading practices outlawed by MAR

Spoofing (one side of trade)

Layering (two sides of trade)

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Abusive behaviour by trading venues

Market abuse can also be committed by trading venues…

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Systems for detection of abuse

System for detection Training

Suspicious transaction and

order reports

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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

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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?

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Takeaway questions

Am I subject to MAR (II)?

NoYes

Relax and grab another

bacon sandwich/ glass

of wine…

Ask yourself:

• Do I need to make any changes to

my system or procedures?

• What areas of my business pose a

compliance risk?

• Are my employees properly trained

and informed?