Market abuse regulation

How to comply with the Market Abuse Regulation (MAR)

The effective functioning of European financial markets, accompanied by enhanced public confidence in securities and derivatives, is a critical element of the European Union’s (EU) economic growth. For financial markets to ensure market integrity and subsequently encourage public confidence, transparency is essential. In this context, market abuse refers to all actions and practices that harm the integrity of financial markets and discourage public confidence in securities and derivatives.

Throughout this commentary, the SALVUS Regulatory Compliance team discusses the elements which constitute Market Abuse by providing answers to the following questions:

1. What is Market Abuse?
2. Market Abuse regulatory framework and objectives
3. What is Inside Information and how is it connected to Insider Dealing?
4. How is Market Manipulation?
5. Accepted market practices
6. Prevention and detection of Market Abuse

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1. What is Market Abuse?

Market abuse encompasses illicit activities within the financial markets. These subsequently prevent adequate market transparency, a prerequisite for financial market proper functioning. Market abuse consists of all the actions falling under the definitions of:

  • insider dealing,
  • unlawful disclosure of inside information, and
  • market manipulation.

Activities subject to market abuse can be transactions, trades, and behaviour relating to any financial instrument, irrespective of whether they take place in a trading venue or not.

2. Market Abuse regulatory framework and its objectives

The European Regulation No 596/2014 on Market Abuse (MAR) was prepared and adopted at an EU level. The primary scope of MAR is to avoid potential regulatory arbitrage and guarantee less regulatory complexity as well as legal certainty for market participants. Additionally, the European Directive 2014/57/EU focuses on Criminal Sanctions for Market Abuse (CS MAD). Therefore, MAR and CS MAD formed the Market Abuse Directive II (MAD II) which has been applicable since the 3rd of July, 2016.

The main objectives of MAD II are:

  • make financial markets more robust and more transparent,
  • harmonise core concepts and rules on market abuse,
  • broaden the scope of instruments covered,
  • ban the manipulation of benchmarks,
  • reinforce the investigative and sanctioning powers of competent authorities and strengthen the in-between cooperation,
  • ensure a single rulebook,
  • introduce common definitions of criminal offences for insider dealing and market manipulation, and
  • impose maximum criminal penalties for the more serious market abuse offences.

In regards to investment services offered in and from Cyprus, the authority responsible for the application of the market abuse regime is the Cyprus Securities and Exchange Commission (CySEC). Both MAR and CS MAD have been transposed into national legislation through Law 102(I)/2016 and Law 136(I)/2016 respectively.

In this context and according to the Anti-Money Laundering (AML) Law, any market abuse practice constitutes a criminal offence as it involves the generation of illicit assets from fraudulent activities. For investment firms, market abuse may arise in the layering and integration stages of money laundering and as such, market abuse practices should be monitored for anti-money laundering purposes as well.

3. What is Inside Information and how is it connected to Insider Dealing?

Any information is deemed to be inside information if it is described by the following characteristics:

  1. it is of precise nature, indicating existing or reasonably expected circumstances to come into existence,
  2. has not been made public to investors, inside or outside the Republic, and cannot be derived from public information,
  3. relates directly or indirectly to one or more issuers or one or more financial instruments, and enables a conclusion to be made as to the effect on the financial instruments’ prices,
  4. if it was made public it would be likely to have a significant effect on the prices of related financial instruments or their derivatives.

In this respect, insider dealing concerns the situation where a person in possession of inside information uses the information to acquire or dispose of, cancel or amend an order regarding the financial instruments to which the information relates. Such actions can be taken either for the individual’s account or the account of a third party, directly or indirectly.

4. What is Market Manipulation?

Market manipulation is composed of all the actions undertaken aiming to distort the supply, demand or price of a financial instrument, a spot commodity contract, or an auctioned-based product on emission allowances. Such practices are considered:

  • entering into a transaction, placing an order to trade, or any other behaviour which provides false or misleading signals,
  • entering into a transaction, placing an order to trade, or any other activity which employs a fictitious device or any other form of deception,
  • transmitting or providing false information relating to a benchmark or manipulating the benchmark’s calculation,
  • disseminating information through media including the internet, or by any other means which provide false or misleading signals.

It is worth noting that dissemination of rumours by a person who knew or ought to have known that the information was false, is also considered market manipulation.

5. Accepted market practices

Any competent authority, such as CySEC, can classify a specific market practice as accepted. Market practices are accepted if the practice:

  • provides the market with a substantial level of transparency,
  • ensures a high degree of operational safeguards of market forces and equilibrium of supply and demand,
  • has a positive impact on market liquidity and efficiency,
  • considers the trading mechanism of the financial market and enables proper and timely reaction of market participants to new situations,
  • does not risk the integrity of related markets, regulated or not, and of financial instruments within the EU,
  • does not infringe rules for the prevention of market abuse or codes of conduct, as this has been determined by the outcome of another competent authority’s investigation,
  • considers the structural characteristics of the relevant market, such as
    • if it is regulated or not,
    • the types of financial instruments traded,
    • the types of market participants,
    • the extent of retail investor participation in the market.

6. Prevention and detection of Market Abuse

Obliged entities are required to have in place effective arrangements and systems to prevent and detect insider dealing and market manipulation as well as attempts of them. Such entities can be market operators or investment firms, as well as persons who professionally arrange and execute transactions.

It is highlighted that such arrangements must cover all orders received and transmitted and all transactions executed, including their cancellations and modifications. Any order or transaction presented as suspicious must be reported to the competent authority without any delay.

Moreover, we mentioned in a previously authored article the anticipated European Regulation for the Markets in Crypto-Assets (MiCA) as it has been proposed, will include provisions relating to the prevention and management of market abuse regarding crypto-assets. Thus, Crypto-Asset Services Providers (CASP) will be obliged to establish similar arrangements in this regard.

Final thoughts

In conclusion, the market abuse regime plays a pivotal role in the protection of investors and organisations and consequently ensures the financial markets’ efficiency, transparency, and integrity. Stakeholders of Cyprus Investment Firms (CIF) and other CySEC regulated entities, shall be in a position to prevent, detect, and manage existing and potential market abuse threats which can be achieved through targeted training.

For that purpose, SALVUS Funds in collaboration with the Institute for Professional Excellence (IforPE) has designed a self-study Continuous Professional Development (CPD) course titled Compliance with Market Abuse Regulation suitable for Compliance, AML, and Brokerage Officers, as well as other professionals employed in the investment services industry.

The course is designed to offer professionals all the necessary information regarding the market abuse regulatory framework, answer frequent questions on market abuse matters, outline details relating to market abuse practices, and guide regulated entities for the submission of Suspicious Transactions and Order Reports (STOR) to the regulator.

In addition, the SALVUS Regulatory Compliance team can guide investment firms, funds, Crypto-Asset Services Providers, and other CySEC regulated entities, in achieving compliance with MAR provisions.

Do not hesitate to contact us at [email protected] or call us at +357 7000 7898 if you require support about your Market Abuse regulatory obligations or information about our Market Abuse course on IforPE.

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The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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