Oct 14, 2016

One of the latest EU regulations came into force on the 3rd of July 2016. As many such regulations it is a quiet revolution attracting the attention of only people directly affected by it. For the rest, it is another convoluted text intended to strengthen the EU regulatory power and to prevent market distortions from market abuse (i.e. insider trading and market manipulation).

The questions, which most often came to mind, when the press releases hit are: What has changed and how does the EU regulatory framework on market abuse look like now?

What has changed with MAR entering into force?

MAR or Market Abuse Regulation is the updated version of MAD, the Market Abuse Directive (2003/6/EC). The purpose of MAR is to address some failures of MAD in serving as effective deterrent to market abuse. Some of these failures are tackled by MAR alone, while others together with the Directive on Criminal Sanctions for Market Abuse. What needs to be mentioned is MAR’s alignment with MiFID II, which enters into force in 2017. MAR is also complemented by the Directive on criminal sanctions for market abuse. Hence, we are having a revamp of the old legislative framework governing financial and commodity markets with a newer set of regulations, which are more up-to-date with the recent market and trading developments and which are stronger and more consistent across the Union on sanctions.

• Broader scope

The scope of the market abuse regime has been widened by including financial instruments traded on multilateral trading facilities (MTFs), other organized trading facilities (OTFs) and some over-the-counter activities (e.g. credit default swaps).

The regulation has been adapted to new technologies, by prohibiting certain high frequency trading (HFT) strategies.

Furthermore, MAR prohibits the manipulations of benchmarks because of the widespread use of the latter in pricing of financial instruments. The EU Commission identifies benchmarks as having a pronounced impact on market confidence and their manipulation is meant to have further reaching consequences. To put it simply, in addition to all platforms for all financial instruments, MAR covers benchmarks.

The regulation not only prohibits market abuse, but the attempt of market abuse as well.

• Stronger sanctions

Apart from widening the scope of the previous legislation i.e. MAD, MAR increases the sanctions for violations under it. The regulation expects that offenders will be fined according to the seriousness of their actions, while taking into consideration any mitigating or aggravating factors. Still, to ensure a greater harmonization across EU administrative sanctions, MAR has set the minimum fine of EUR 5 million for natural person and EUR 15 million or 15 % of the total annual turnover for legal persons for insider dealing and market manipulation. Still, sanctions have to be specified in the national laws of Member States by the relevant competent authorities.

How does the EU regulatory framework on market abuse look like after MAR?

MAR interacts with MiFID II and the Directive on criminal sanctions for market abuse.

MAR is based on some of the definitions (e.g. organized trading facilities (OTFs)) and regulations included in MiFID II, meaning that the latter need to be transposed into national laws for MAR to function effectively. MiFID II latest deadline for transposition is 3rd of July 2017.

The Directive on criminal sanctions for market abuse has been published in 2014 and requires transposition until beginning of July 2016. Becoming effective around the same time (at least for countries which have transposed the Directive) MAR and the Directive on criminal sanctions for market abuse are intended to work in parallel. While MAR is defining administrative sanctions, the Directive is introducing criminal sanctions. The Commission considers criminal sanctions necessary, for they express social disapproval on a whole new level, namely at least four years for market manipulation, insider dealing and any recommendations/inducement to engage in insider dealing. The Directive makes benchmarks manipulation a criminal offence as well.

On a final note, MAR is an attempt to build upon the observed results from MAD, close all loopholes left for market abuse and make sure there are deterrent sanctions in place for all Member States. There is still clearly a long way to go before the EU intended framework begins to function similarly across the Union, nevertheless there is some progress with MAD.

Written by Snezhina Mileva

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