Four years on from its implementation, the market abuse regulation (MAR) is widely seen as having contributed to increasing market integrity and investor protection in the EU and the UK, a poll has revealed.
Asked whether they think MAR is achieving the goals it was created for, 40% of market participants polled during an event organised by the Association for Financial Markets in Europe said the regime has so far been “quite successful” in doing so. Around 20% said it was very successful, while 24% said it was not particularly successful.
“Four years into a new regulatory regime is still quite early to define its success,” said Emily Ballisat, solicitor at BNP Paribas Corporate and Institutional Banking. “It all depends how you define success. Some areas are difficult to assess in full at this stage, while others would probably benefit from some enhancement.”
A number of high-profile market abuses case were detected in other jurisdictions in recent months. In September, New York based investment bank JP Morgan was handed a $920 million fine after admitting to manipulating precious metals and treasury markets between 2008-16. In another case of metals market manipulation during the same period, Bank of Nova Scotia reached agreements with the US Department of Justice and the Commodity Futures Trading Commission and was issued an aggregate fine of $127.5 million.
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Meanwhile, in the UK, the FCA imposed a penalty of £100,000 to Corrado Abbattista, former chief investment officer at hedge fund Fenician Capital Management, for market manipulation – the first successful case of its kind in the country. “Transparency on the value of this is very important for the industry, as otherwise it [MAR] could just look like extra cost for no apparent purpose,” said Nick Bayley, managing director in consultancy Duff & Phelps’s compliance and regulatory practice.
Certain tweaks to the regime itself have also been made or proposed. As part of the UK’s new post-Brexit financial regulation roadmap, the FCA offered to increase the maximum sentence for market abuse from seven to 10 years at the end of the transition period. The watchdog also pressed firms to find more creative ways to monitor abuse and misconduct, given that large swathes of employees are set to continue to work from home for the foreseeable future.
“The industry has coped pretty well so far and we are now going to be looking to it to find some more…resilient solutions to these issues,” said Megan Butler, executive director of supervision at the FCA. “Most organisations are realising that lots of controls, oversight and cultural practices are built on pre-existing relationships. The longer working from home goes on, the more they are at risk of breaking down.”
In addition, the Futures Industry Association (FIA) released guidelines on specific aspects of MAR, including monitoring, surveillance systems and the filing of suspicious transaction and order reports (Stors). “Market abuse is a global concern and global regulators consider market participants to be the first line of defence in the identification and prevention of market abuse,” said Bruce Savage, FIA’s EU head. "These guidelines aim to provide a useful implementation standard for these requirements, in particular for the surveillance systems and controls that are required under Article 16 of MAR."
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MAR review
This quarterly has also given way to the publication of the much-awaited review of the regime. Topics under review included insider dealing, market manipulation, market soundings and the definition and delayed disclosure of inside information, as well as the appropriateness of trading prohibition for staff members with managerial responsibilities.
“Overall, we concluded that the regulation works well and is fit for purpose,” said Verena Ross, executive director at the European Securities and Markets Authority (Esma). “The vast majority of changes that we proposed to the European Commission represent an evolution, taking into account the experience [of the regime] and its application, rather than a revolution or radical overhaul of the framework.”
Esma, for instance, proposed further guidance on inside information but did not recommend amendments to its general definition. “We believe that the current broad definition is effective in preventing market abuse,” said Ross. The regulator also clarified that market soundings are compulsory and proposed simplifications to reduce the operational burden of the regime. “Together with other recent measures in the area of money laundering, I believe our findings highlight again the need for firms to have efficient control systems in place, in order to prevent and report possible illegal behaviour,” she added.
Some market participants agreed with Esma’s conclusions. “I personally agree with the decision on market soundings,” said Rodrigo Buenaventura, general director of markets at the Spanish National Securities Market Commission (CNMV). “The question of whether to make this compulsory was controversial until the end, but I think it was needed. Market soundings have become common practice by now, and although they do have ties with extra-territoriality issues, standards shouldn’t be lowered for that reason. Those issues should be dealt with separately.”
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Not everyone, however, agrees with Esma’s assessment. “Esma’s conclusions, at least on the enforceability of the pre-sounding regime [part of market soundings], are likely to be disappointing,” said Ruari Ewing, senior director overseeing market practice and regulatory policy at the International Capital Market Association (Icma). “They are to the extent that they add additional administrative burdens and further disencentivise pre-sounding, even where it’s clear that no inside information is involved. It will be for the European Commission to consider these proposals in terms of legislating any changes to MAR.”
Good, but perfectible
Common criticisms to MAR as a whole are its burdensome character from an administrative point of view, its broad scope, and issues related to extra-territoriality. “Investment recommendations would probably top the list in terms of being burdensome for investment firms, due to the extent and range of information that has to be given to the recipient,” said BNP Paribas’s Ballisat. “There are questions over whether investors are really reading the data as needed. Some firms are also struggling to coordinate insider lists with all the different parties involved in a transaction.”
Other sources argue that lightening the administrative burden was never MAR’s goal to begin with. “I don’t believe this was the point – the point was to improve and increase transparency in a number of respects,” said Buenaventura. “The aim was also to unify and standardise a fragmented regime in which disparate and disproportionate sanctions applied across various jurisdictions for a similar fault. One of the positive effects of MAR is that it has reduced the incentive to violate certain rules, and has suppressed arbitrage issues.”
In Spain, surveillance requirements under MAR have proven helpful, according to Buenaventura. “We have received some very useful tips on potential market abuse,” he said. “More than 40 people have been sanctioned for insider dealing, as per our latest yearly report. We also detected around 15 cases of market manipulation, for which we handed over six million euros’ worth of fines.”
While the Commission is still evaluating Esma’s review report, concerns are now also emerging over potential divergence between the UK and the EU in applying the regime after the end of the Brexit transition period. “Everyone is interested in having more integrity and transparency, so we need to take a long-run perspective on this,” said Buenaventura. “There is a strong case for keeping a high degree of convergence between both regimes – having divergent implementation on requirements such as market soundings or buy-back programmes, for instance, would make no sense, and would only complicate things further for market participants.”
