Inside the Market Abuse Regulation: a brief, not so manipulative (& fully transparent) guide – Pt. 1

The Market Abuse Regulation (or MAR) is the EU’s cornerstone piece of legislation in its fight against the abuse in financial markets (market abuse). MAR expressly acknowledges that the smooth functioning of financial markets, and public confidence therein, is highly dependent on market integrity – which, in itself, is severely hampered by market abuse.

This article (the first of two parts) will focus on the scope and principles of MAR and will also shed some light on the three main prohibitions under MAR and their corresponding safe harbours.

Scope

MAR effectively encompasses any transaction, order, or behaviour relative to the following financial instruments (as defined in MiFID II), and this irrespective of whether it (i.e. the behaviour) takes place on a trading venue or not:

  1. financial instruments admitted to trading on a regulated market, multilateral trading facility (“MTF”), or organised trading facility (“OTF”);
  2. financial instruments for which a request for admission to trading on a regulated market or MTF has been made; and
  3. financial instruments not falling under points a), or b) above, but the price or value of which depends on, or has an effect on, the price or value of the said financial instruments.
Market Abuse – a closer look 

In tangible terms, market abuse is a concept which encompasses unlawful behaviour in the financial markets, and is largely understood to consist of:

  1. Insider dealing;
  2. Unlawful disclosure of inside information; and
  3. Market manipulation.

All of the these behaviours are expressly prohibited under articles 14 and 15 of MAR, and will be looked at in further detail below. However, before exploring the ins and outs of market abuse, it is pertinent to discuss the most central theme in MAR – the definition of “inside information” – since all the following discussion will center around information which MAR classifies to be inside information.

Inside information

Inside information is information (i) of a precise nature, (ii) which has not been made available to the public, (iii) relating directly to one or more issuers or financial instruments, and (iv) which if made public would likely have a significant effect on the prices of those financial instruments or of related derivative financial instruments (i.e. information which a reasonable investor would likely use as part of the basis of his/her investment decisions.)

Information is deemed to be of a precise nature where it indicates a set of circumstances which exists (or which may be reasonably expected to come into existence), or an event which has occurred (or which may be reasonably expected to occur), where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances and/or event on the price of a financial instrument, or related derivative financial instrument.

  1. Insider dealing

Insider dealing arises where a person who possesses inside information uses that information for the purpose of acquiring or disposing of, for his/her own account or that of others, directly or indirectly, financial instruments to which that information relates. Insider dealing also encompasses recommendations to, or the inducement of, another person to engage in insider dealing, assuming of course that the person using said recommendation, or acting on such inducement, knows, or ought to know, that such recommendation or inducement is based on inside information.

It is important to note that MAR establishes a rebuttable presumption that the acquisition or disposal of financial instruments by a person who possesses inside information will have been made on the illicit use of that inside information. Although rebuttable, this presumption may prove difficult to negate since the evidence and documentary proof required to prove one’s innocence would require the actor to have kept detailed and meticulous records of his/her actions in the hope that an investigator believes that the transaction was not carried out on the basis of inside information. The safest approach to take is therefore to avoid transacting in financial instruments of an issuer for as long as one is in possession of inside information.

  1. Unlawful disclosure of inside information

Given that inside information is an important tool for investors, and given MAR’s efforts to ensure that investors are given access to information (i.e. reduce information asymmetries), it comes as no surprise that MAR prohibits the unlawful disclosure of inside information. The idea behind this prohibition is that inside information should (as far as possible) be disseminated in a uniform and orderly fashion to the market generally, not in a piecemeal fashion, for the benefit of a select few (to the detriment of others). In brief inside information is deemed to be unlawfully disclosed where a person discloses inside information to any other person, except where this disclosure is made in the normal exercise of one’s employment, profession or duties. The onward disclosure of recommendations or inducements (as aforementioned) will also amount to unlawful disclosure of inside information where the person disclosing the recommendation or inducement knows, or ought to know, that it is based on inside information.

  1. Market Manipulation

The final element of the market abuse trident is market manipulation; tangible examples of which range from the entering into of a transaction, or placement of an order to trade, which gives (or is likely to give) false or misleading signals as to the supply, demand or price of a particular financial instrument, to the dissemination of information in the media (including online) which is likely to bring about the same result. This element also covers attempts to engage in market manipulation, and behaviour which is likely to lead to market manipulation.

Safe Harbours

In its quest to eliminate market abuse – by prohibiting insider dealing, the unlawful disclosure of inside information and market manipulation – MAR recognises that certain actions may prima facie seem illegitimate (and in contravention of the said prohibitions) but, in reality, are necessary for the smooth and efficient functioning of companies on the financial market generally. In legal jargon, these (legitimate) actions are known as ‘safe harbours’. Some safe harbours apply across the board (e.g. safe harbours for issuers engaging in share buy backs or in market stabilization programmes). In these instances, MAR creates specific frameworks which, if rigorously adhered to, will exempt persons from accusations of any unlawful behaviour in terms of the Market Abuse Regulation. MAR also creates specific safe harbours for each of the specific prohibitions referred to above:

  • Legitimate behavioursCognizant of the far reaching implications of the rebuttable presumption that any person who possesses inside information and deals in the financial instruments of an issuer (to which that information relates) will be deemed to have engaged in insider dealing, MAR tries to create some balance and create some leeway for market participants to operate by legitimizing certain behaviours which, at face value, may seem to be acts of insider dealing, but which are required for the markets to function properly. For instance the mere fact that a legal person possesses inside information should not automatically lead to the conclusion that this has been used for the purposes of engaging in insider dealing, provided that: (i) adequate and effective internal arrangements are in place to ensure that the natural person making a decision on its behalf to acquire or dispose of financial instruments to which inside information relates was not in possession of said inside information, and (ii) it has not encouraged, recommended or otherwise induced said natural person acting on its behalf to acquire or dispose of financial instruments to which inside information relates.
  • Market soundingsa market sounding is a roadshow which comprises the communication of information, prior to the announcement of a transaction in financial instruments, 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. Market soundings (properly carried out) do not constitute an unlawful disclosure of inside information, provided that the person disclosing the said information (referred to as a “disclosing market participant”) adheres to specific rules and procedures laid down in MAR and other implementing legislation.
  • Accepted market practicesWhen a person enters into a transaction, or issues an order to trade, which may result in  market manipulation, and that person manages to establish that his/her reasons for entering into such transaction, or issuing such an order, were legitimate, and in conformity with accepted market practices in the market concerned, that person will not be deemed to have engaged in market manipulation. It ought to be highlighted that accepted market practices differ between member states and must be formally established by the competent authority in each member state. To date, the MFSA has not yet established any such accepted market practices, and therefore, it will be difficult, if not impossible, for any person to avail himself/herself of this safe harbour in respect of any transaction over which the MFSA has been granted regulatory oversight.