Market Abuse

Preventing market abuse in financial markets

Regulation (EU) No 596/2014 on market abuse

The market abuse regulation (MAR) seeks to ensure that European Union (EU) regulation keeps pace with market developments to combat market abuse on financial markets as well as across commodity and related derivative markets (i.e. markets trading primary products such as gold, wheat, etc., and financial instruments based thereupon).It has applied since 3 July 2016.

It explicitly bans the manipulation of benchmarks (such as the London Interbank Offered Rate — known as the LIBOR).
It reinforces the investigative and sanctioning powers of the regulators appointed by EU countries to ensure the proper functioning of their financial markets.
It ensures a single EU rulebook while reducing administrative burdens on smaller and medium-sized issuers where possible.

Banning abuse in financial markets

Market abuse inhibits the full transparency which is essential for trading in today’s integrated financial markets. The rules outlaw 3 types of abuse:

market manipulation;
insider dealing
unlawful disclosure of non-public information.
MAR rules apply to a person or a company committing market abuse with respect to the trading of financial instruments, whether through trading platforms or negotiated privately in ‘over-the-counter’ transactions.

Administrative sanctions

MAR rules require EU countries to specify administrative pecuniary sanctions of at least €15 million or 15% of the total annual turnover for legal persons (such as companies) and of €5 million for individuals, to be applied by the competent authorities.

Strengthening regulators’ investigatory powers

MAR rules reinforce the supervisory and investigatory powers of the regulators appointed by each EU country to ensure the proper functioning of their financial markets. For instance, among other powers, they are able to carry out on-site inspections and investigations and to request the freezing or sequestration of assets.

Since the adoption of the MAR, the European Commission has adopted a series of regulations that supplement or further clarify certain aspects of the regulation. These cover, among other things:

the conditions applicable to buy-back programmes* and stabilisation measures (Regulation (EU) 2016/1052);
details regarding the insider lists that issuers of financial instruments must draw up (Regulation (EU) 2016/347);
rules concerning the notification of suspicious orders or transactions (Regulations (EU) 2016/378 and (EU) 2016/957);
rules on the presentation of investment recommendations (Regulation (EU) 2016/958) and market soundings* (Regulations (EU) 2016/959 and (EU) 2016/960);
the technical means for appropriate public disclosure of inside information and for delaying the public disclosure of inside information (Regulation (EU) 2016/1055);
procedures and forms for competent authorities exchanging information with the European Securities Market Authority (Regulation (EU) 2017/1158).

KEY TERMS

Market manipulation: entering into a transaction or behaviour that:
gives or is likely to give false or misleading signals as to the supply/demand of a financial instrument;
secures or is likely to secure the price of a financial instrument at an abnormal level.

It may also consist of:

a transaction or behaviour by usiing a fictitious device or other form of deception;
disseminating misleading information;
transmitting false or misleading information,
providing false or misleading inputs, or
any action which manipulates the calculation of a benchmark.

Insider dealing: arises where a person uses inside information by transacting, on his own account or for the account of a third party, in a financial instrument to which that inside information relates. Inside information is of a precise nature, which is not public, relating to issuer(s) of financial instruments and which, if made public, would have a significant effect on prices.

Unlawful disclosure of inside information: arises when a person possesses inside information and discloses it to another person (e.g. through leaking confidential documents containing inside information), except if the disclosure is made in the normal exercise of an employment, a profession or duties.

Buy-back programmes: when companies buy back their own shares from the marketplace. This most frequently arises when companies feel their shares are undervalued.
Market soundings: a communication of information prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction, and the conditions relating to it such as its potential size or pricing to one or more potential investors.

DOCUMENTS

Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (OJ L 173, 12.6.2014, pp. 1-61)

Successive amendments to Regulation (EU) No 596/2014 have been incorporated in to the original document. This consolidated version is of documentary value only.

Commission Implementing Regulation (EU) 2018/292 of 26 February 2018 laying down implementing technical standards with regard to procedures and forms for exchange of information and assistance between competent authorities according to Regulation (EU) No 596/2014 of the European Parliament and of the Council on market abuse (OJ L 55, 27.2.2018, pp. 34-49)

Commission Implementing Regulation (EU) 2017/1158 of 29 June 2017 laying down implementing technical standards with regards to the procedures and forms for competent authorities exchanging information with the European Securities Market Authority as referred to in Article 33 of Regulation (EU) No 596/2014 of the European Parliament and of the Council (OJ L 167, 30.6.2017, pp. 22-30)

Commission Delegated Regulation (EU) 2016/908 of 26 February 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council laying down regulatory technical standards on the criteria, the procedure and the requirements for establishing an accepted market practice and the requirements for maintaining it, terminating it or modifying the conditions for its acceptance (OJ L 153, 10.6.2016, pp. 3-12)

Commission Delegated Regulation (EU) 2016/909 of 1 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the content of notifications to be submitted to competent authorities and the compilation, publication and maintenance of the list of notifications (OJ L 153, 10.6.2016, pp. 13-22)

Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures (OJ L 173, 30.6.2016, pp. 34-41)

Commission Delegated Regulation (EU) 2016/957 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the appropriate arrangements, systems and procedures as well as notification templates to be used for preventing, detecting and reporting abusive practices or suspicious orders or transactions (OJ L 160, 17.6.2016, pp. 1-14)

Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest (OJ L 160, 17.6.2016, pp. 15-22)

Commission Implementing Regulation (EU) 2016/347 of 10 March 2016 laying down implementing technical standards with regard to the precise format of insider lists and for updating insider lists in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council (OJ L 65, 11.3.2016, pp. 49-55)

Commission Implementing Regulation (EU) 2016/523 of 10 March 2016 laying down implementing technical standards with regard to the format and template for notification and public disclosure of managers’ transactions in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council (OJ L 88, 5.4.2016, pp. 19-22)

Commission Implementing Regulation (EU) 2016/378 of 11 March 2016 laying down implementing technical standards with regard to the timing, format and template of the submission of notifications to competent authorities according to Regulation (EU) No 596/2014 of the European Parliament and of the Council (OJ L 72, 17.3.2016, pp. 1-12)

Commission Implementing Regulation (EU) 2016/959 of 17 May 2016 laying down implementing technical standards for market soundings with regard to the systems and notification templates to be used by disclosing market participants and the format of the records in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council (OJ L 160, 17.6.2016, pp. 23-28)

Commission Delegated Regulation (EU) 2016/960 of 17 May 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings (OJ L 160, 17.6.2016, pp. 29-33)

Commission Implementing Regulation (EU) 2016/1055 of 29 June 2016 laying down implementing technical standards with regard to the technical means for appropriate public disclosure of inside information and for delaying the public disclosure of inside information in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council (OJ L 173, 30.6.2016, pp. 47-51)

Commission Implementing Directive (EU) 2015/2392 of 17 December 2015 on Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards reporting to competent authorities of actual or potential infringements of that Regulation (OJ L 332, 18.12.2015, pp. 126-132)

Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers’ transactions (OJ L 88, 5.4.2016, pp. 1-18)

Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) (OJ L 173, 12.6.2014, pp. 179-189)

Criminal sanctions for market abuse

This European Union legislation aims at improving the integrity of European financial markets.

Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive).

Abuses that take place on financial markets, for instance when market participants spread false information on the prices of financial products, may be very detrimental to consumers, investors and the economy as a whole.

This act lays down criminal sanctions for the most serious, intentionally committed market abuses. The new rules should be applicable no later than July 2016 in all EU countries.

KEY POINTS

anctions for people (natural persons) – prison sentences

Under the new rules, insider dealing and market manipulation, two major forms of market abuse, are punishable by a maximum term of imprisonment of at least 4 years.

Market manipulation consists in manipulating the prices of financial products artificially. For instance, this can happen when an individual spreads false information on the supply, the demand or the price of a financial product.

Insider dealing is when an individual trades a financial product with access to ‘inside information’. This is confidential information relating to the financial product traded or the company that issued it on the market. Accessing this type of information gives him an unfair advantage.

Unlawful disclosure of ‘inside information’ is also considered as an offence punishable by a maximum term of imprisonment of at least 2 years. This happens when an individual discloses ‘inside information’ to other persons, unless this disclosure is made in the regular exercise of its profession.

2. Sanctions for companies held liable (legal persons)

The rules provide that companies held liable for market-abuse offences are subject to criminal or non-criminal fines. Other sanctions may also be applied, such as a temporary or permanent disqualification from the practising of commercial activities.

Regulation (EU) No 596/2014, adopted alongside these new rules, strengthens administrative sanctions that can also be imposed for market abuses. It also strengthens national regulators’ investigative powers to detect abuses on financial markets.

REFERENCES

Directive 2014/57/EU