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© Allen & Overy 2016
Strengthening the market
abuse framework – what you
need to know about MAR and
MAD II Etay Katz, Partner – Financial Services Regulatory
Jodi Norman, Associate – Financial Services Regulatory
Sarah Hitchins, Associate – Litigation
14 April 2016
2 © Allen & Overy 2016
Allen & Overy LLP
One Bishops Square, London E1 6AD, United Kingdom Tel +44 20 3088 0000 Fax +44 20 3088 0088.
If you would like to attend one or more of our seminars, please visit www.aoseminars.com where you can register.
If you have any queries or require further information please email [email protected]
2016 Seminar schedule
Thursday 14 April
8.30am – 9.30am
Bishops Square
Strengthening the market abuse framework – what you need to know about MAR and
MAD II
Etay Katz, Partner – Financial Services Regulatory
Jodi Norman, Associate – Financial Services Regulatory
Sarah Hitchins, Associate – Litigation
Friday 15 April
8.30am – 9.30am
Bishops Square
The 2016 U.S. Elections and Your Company’s Political Law Compliance Program
Charles Borden – Washington, DC, Partner
Claire Rajan – Washington, DC, Associate
Samuel Brown – Washington, DC, Associate
Thursday 28 April
12.30pm – 1.30pm
Bishops Square
Global trends in hostile M&A
Hartmut Krause, Partner – Frankfurt
Richard Hough, Partner – Corporate
Seth Jones, Partner – Corporate
Jaya Gupta, PSL Counsel – Corporate
Maarten Muller, Of Counsel – Netherlands
Tuesday 17 May
9.00am – 10.00am
Bishops Square
A basic guide to BEPS for non–tax specialists
Charles Yorke, Partner – Taxation
Lydia Challen, Partner – Taxation
Thursday 19 May
8.30am – 9.30am
Bishops Square
Internal investigations: managing increased expectations and challenges
Arnondo Chakrabarti, Partner – Litigation
Jonathan Hitchin, Partner – Litigation
Blair Keown, Senior Associate – Litigation
Brandon O’Neil, Senior Associate – Litigation
Sarah Hitchins, Associate – Litigation
Wednesday 25 May
8.30am – 9.30am
Bishops Square
Sanctions update
Matt Townsend, Partner – Corporate
© Allen & Overy 2016 3
Strengthening the market abuse framework – what you
need to know about MAR and MAD II
8:00 – 10:00
Etay Katz
Jodi Norman
Sarah Hitchins
Summary
The European Commission reviewed the existing Market Abuse Directive following the financial crisis and introduced
proposals in 2014 to strengthen the regime. A new Market Abuse Regulation (MAR) and a new Directive on criminal
sanctions (MAD 2) will become applicable for most purposes in July 2016. This seminar will provide an update on the scope
and impact of the Directive and Regulation, looking at areas such as the disclosure of inside information, the maintaining of
Insider Lists and the communication protocol for market soundings and the likely impact for cases that the FCA takes to
enforcement under the new regime.
4 © Allen & Overy 2016
Speaker biographies
Etay Katz Partner – Financial Services
Regulatory
Contact Tel +44 20 3088 3823
Etay advises a wide range of financial services providers on the impact of both national and
international regulatory regimes on their operations. He also advises on the regulation of both
retail and wholesale financial products and services.
Etay is the author of a chapter in Oxford University Press’ prominent publication Financial
Services Law and is the General Editor of Oxford University Press’ Financial Services
Regulation in Europe. He has been recognised as a leading individual for regulatory advice by
IFLR1000 and Legal 500 and is regularly quoted in the press on regulatory matters.
Jodi Norman
Associate – Financial Services
Regulatory
Contact
Tel +44 20 3088 4259
Jodi advises on a wide range of financial services regulatory matters, including large–scale
regulatory change projects. Jodi holds a Diploma in ‘Investment Compliance’ and regularly
advises on governance, risk and compliance arrangements (including in respect of financial
crime: anti–money laundering, anti–bribery and corruption and market abuse). Her experience
covers both contentious and non–contentious matters and she has been involved in a number
of internal and independent investigations and remediation exercises on behalf of clients. In
2013, Jodi was awarded ‘Regulatory Lawyer of the Year’ by Thomson Reuters.
Sarah Hitchins
Associate – Litigation
Contact Tel +44 20 3088 3948
Sarah is an associate in Allen & Overy’s Banking, Finance and Regulatory Litigation Group.
Sarah specialises in representing firms and individuals involved in financial services
regulatory investigations and enforcement action in relation to a broad variety of wholesale
and retail issues. Sarah has also completed a secondment to the Enforcement Division of the
FSA (as it then was). In 2015, Sarah was selected by Global Investigations Review (GIR) as
one of the top 100 women in investigations.
© Allen & Overy 2016 5
Notes
© Allen & Overy 2016
Strengthening the market abuse framework - what
you need to know about MAR and MAD IIEtay Katz, Jodi Norman and Sarah Hitchins
14 April 2016
6 © Allen & Overy 2016
Notes
© Allen & Overy 2016 22
MAR/MAD II – Why should you care?
The scope of instruments falling within the market abuse regime will be
significantly expanded‒ Concerns around identifying in-scope financial instruments
‒ Extra-territorial effect of the market abuse regime widened
New procedural requirements increase firms’ compliance requirements‒ Some examples: market soundings, investment recommendations,
prevention and detection of market abuse
Pursuing firms and individuals for market abuse is a priority for the FCA‒ Regulators are increasingly focusing on activity with a cross-border
element
‒ FCA increasingly focusing on market misconduct outside of equities
markets
‒ Will there be an increase in enforcement based on inadequate market
abuse systems and controls?
Increased
Scope
Increased
complexity
Increased
enforcement?
© Allen & Overy 2016 7
Notes
© Allen & Overy 2016
Practical Impact: Firms’ market abuse controls
3
Policies/Procedures Record keeping STORs
Oversight and monitoring Governance Management Information
8 © Allen & Overy 2016
Notes
© Allen & Overy 2016 44
What changes to the market abuse regime are
occurring at the European level?
Background: MAR
– MAR will directly apply in all Member States from 3 July 2016,
replacing the current EU Market Abuse Directive
– MAR relies on concepts introduced by MiFID II and accordingly
some provisions will not apply until MiFID II becomes operational
(anticipated: 3 January 2018)
– European Commission must approve delegated measures under
MAR
– European Commission must also adopt regulatory and
implementing technical standards submitted by ESMA
– MAR is complemented by the Directive on Criminal Sanctions for
Market Abuse (CSMAD), the provisions of which must be
transposed by participating Members States by 3 July 2016
Q&A
© Allen & Overy 2016 9
Notes
© Allen & Overy 2016 55
What will be the impact on the UK market abuse
regime?
– S.118 FSMA offences replaced with prohibitions under MAR of
insider dealing, unlawful disclosure of inside information and
market manipulation
– MAR is directly applicable. HM Treasury intend to make the
relevant amendments to FSMA and the Financial Services Act to
accommodate MAR
– HM Treasury will also amend provisions of FSMA relating to the
FCA's enforcement powers
– FCA plans to delete provisions in its handbook which are covered
by MAR whilst retaining existing guidance which is not
incompatible with MAR
– UK has opted out of CSMAD and the UK criminal market abuse
regime will remain
Q&A
10 © Allen & Overy 2016
Notes
© Allen & Overy 2016 66
Increased Scope: New markets & trading venues
Financial Instruments
The price of value of which depends on
or has an effect on the price or value of
financial instruments (inc. CDS/CFDs)
Financial Instruments
– Traded on a Regulated Market
– Traded on a Multilateral Trading
Facility (from 3 July)
– Traded on an Organised Trading
Facility (from MIFID II
Implementation)
For the purposes of Market
Manipulation:
– Spot commodity contracts having
effect on price or value
– Financial instruments having effect
on spot commodity contracts
– Benchmarks
© Allen & Overy 2016 11
Notes
© Allen & Overy 2016 77
Key issues: ESMA centralised list
Issue: How will you know when a financial instrument is
traded on a MTF / OTF?
– ESMA will publish a consolidated list as a centralised reference
point
– Operators required to make specified notifications concerning
FIs to competent authority and these will be notified to ESMA
– Art. 4(2): ESMA's list is not intended to limit the scope of MAR
– Remains to be seen how notifications between operator and
NCA, and NCA and ESMA will operate in practice
– Firm’s systems (including surveillance systems) may need to be
adapted to take into account additions/deletions from the list
WHY?
Since implementation of MAD, MiFID financial instruments have
increasingly been traded on MTFs and a large number are traded
OTC. Drafted to cover instruments traded on OTF, to be
introduced with MiFID IIExpanded
Trading Venues
MTFs/OTFs
12 © Allen & Overy 2016
Notes
© Allen & Overy 2016 88
Key issues: reverse causality
Issue: How do you assess when a financial instrument has
an effect on the price or value of an in-scope financial
instrument?
– Reverse causality: an example, correlated stocks
– Consider whether this affects:
– Loans where borrower issues listed bonds/shares
– Loan CDS/Bond CDS when underlying borrower issues
in-scope bonds/shares
– Unlisted bonds where issuer has listed bonds/shares
– Enforcement approach of the FCA – element of hindsight
Financial instruments
“having an effect on"
financial instruments
traded on a trading
venue
WHY?
It's possible that certain financial instruments not traded on a
trading venue can be used for market abuse
© Allen & Overy 2016 13
Notes
© Allen & Overy 2016 9
Inside information
Definition relating to securities broadly unchanged
If made public it
would have a
significant effect on
price
Information a
reasonable investor
would be likely to
use as part of their
investment decision
Is precise
Clarifies that steps
in a process
leading to events or
circumstances may
be precise
Reflects Geltl v.
Daimler
Has not been made
public
Relates directly or
indirectly to issuers
of financial
instruments
Definition in relation to commodity derivatives is still more restrictive
– Information should be such that it is disclosable on the markets in accordance with legislation, market
rules, contract or custom
ESMA has consulted on future MAR list of information regarding commodity and spot markets
– Non exhaustive indicative list of information required to be published on commodity derivatives markets
or spot markets (Art. 7(5) MAR)
“Insider” definition remains the same
14 © Allen & Overy 2016
Notes
© Allen & Overy 2016 1010
Insider dealing and unlawful disclosure
Insider dealing offence
broadly the same
Now includes cancelling
and amending an order
No changes to the
definition of an insider
"Requiring or
encouraging" insider
dealing replaced with
"recommending or
inducing"
Insider dealing and
unlawful disclosure
Minor changes
Improper disclosure is
replaced with unlawful
disclosure
Still applies where
disclosure is made
outside the normal
exercise of employment,
profession or duties
© Allen & Overy 2016 15
Notes
© Allen & Overy 2016 1111
Insider dealing: legitimate behaviours
– Information barriers: dealing
subject to effective internal
arrangements
– previously MAR 1.33-5
– Pre-existing obligations
– Dealing on own trading intent
– previously MAR 1.3.8
– Legitimate execution of client
orders
– previously MAR 1.3.12/14
MAR 1.3.15 remains
– Market making or authorised
counterparty
– previously MAR 1.3.7
removal of "trading
information" carve out
– Public takeover or merger
– previously MAR 1.3.17
disapplied from stake-
building
– All subject to the "illegitimate reasons“
carve-out
– Recital 31 refers to both the standards
expected of the profession and
standards embodied by MAR (namely
market integrity and inversion
protection)
– Principle 5 requirements?
MAR enshrines principle in
Spector Photo group:
where a person is in
possession of inside
information there is a
rebuttable presumption that
any dealing is on the basis
of that inside information
Art. 8(1) MAR; Recital 24
16 © Allen & Overy 2016
Notes
© Allen & Overy 2016 1212
Market soundings – new formalities
How should firms document
whether the information to be
disclosed in a market sounding is
“inside information”?
Positive obligation so Firms will
have to make significant changes
to their procedures, including in
relation to their market-sounding
communications and their record-
keeping obligations.
Art. 11(3)
Art. 11(7)
Art. 11(8)
Art. 11(5)
Art. 11(6)
Determination and written record of whether
each sounding includes inside information
Pre-disclosure consent, wall-crossing and
confidentiality notice
Notification and record-keeping of cleansing
Recipient assessment of whether
information constitutes inside information
Record keeping!
© Allen & Overy 2016 17
Notes
© Allen & Overy 2016 1313
Market manipulation
Manipulation of benchmarks
– Already a criminal offence in the UK to
make false or misleading statements
relating to benchmarks
– MAR offence currently has a higher
threshold than the equivalent UK provision
– Little expectation that MAR will
change the UK offences in
relation to benchmarks
Guidance
– CoMC 16 to 18 largely disappearing
– MAR provides an indicative list of market
manipulation
– Annexes to the Commission Delegated
Regulation contain descriptions of
practices
– Where do spot commodity contracts
transactions affect financial instruments and
vice versa?
– Accepted market practices
– NCAs can, following notification
to ESMA, establish AMPs
– UK has no existing AMPs and it is not
intended to establish any going
forward
– Market manipulation broadly
similar to the offences
currently set out in s.118
FSMA
– Art. 15 MAR introduces a
new prohibition on
attempting to engage in
market manipulation
18 © Allen & Overy 2016
Notes
© Allen & Overy 2016 1414
Pursuing firms and individuals for market abuse
continues to be a priority for the FCA
‘Market abuse is a serious offence… we
will not hesitate in taking action against
individuals who act on inside information’.
(Georgina Philippou, Acting Director of Enforcement)
(March 2015)
The FSA is committed to taking whatever steps are necessary
to protect the integrity of our markets whatever the techniques
used and wherever the perpetrators are located’.
(Tracey McDermott, Director of Enforcement) (January 2013)
‘Today’s judgment shows the FCA’s
ability and determination to stamp out
abusive market practice wherever it may
occur in UK markets’
(Georgina Philippou, Acting Director of Enforcement)
(August 2015)
© Allen & Overy 2016 19
Notes
© Allen & Overy 2016 1515
But the FCA has had limited success in this area
20 © Allen & Overy 2016
Notes
© Allen & Overy 2016
The FCA has reported a strong pipeline of market
abuse cases
16
‘It discussed the work being undertaken in respect of wholesale and
other market abuse cases and noted there were some delays as a
result of cases being significantly more complex than others or
affected by external factors. It noted there was a strong pipeline of
cases expected’.
FCA Board Minutes, July 2015
© Allen & Overy 2016 21
Notes
© Allen & Overy 2016
Firms’ market abuse controls may come under scrutiny
17
Policies/Procedures Record keeping STORs
Oversight and monitoring Governance Management Information
22 © Allen & Overy 2016
Notes
© Allen & Overy 2016 1818
Suspicious orders and transaction reporting
Delegation of obligation
intra-group
– Outsourcing data analysis/alert
generation
– Must adequately supervise
delegation/outsourcing`
Record keeping obligations
record analysis carried out
regarding suspicious orders and
transactions and reasons for
submitting or otherwise a STOR
– Reporting obligations
extended to "suspicious orders"
– Reports made without delay
– Should follow harmonised
template from ESMA
– Member States are required
to implement whistleblowing
arrangements to facilitate
detection of market abuse
– Financial incentives permitted.
UK has not opted for this
approach
Automated Surveillance Systems
– Systems implemented must be
effective in meeting monitoring and
reporting obligations
Advanced Surveillance
Operators of trading venues
and persons professionally
arranging/executing
transactions must have
systems in place to detect
and report suspicious
transactions and orders
1
2
4
5
3
| BK:35561531.2
24 © Allen & Overy 2016
Allen & Overy LLP
One Bishops Square, London E1 6AD United Kingdom | Tel +44 (0)20 3088 0000 | Fax +44 (0)20 3088 0088 | www.allenovery.com
In this document, Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an
employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.
Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi, Amsterdam, Antwerp, Bangkok, Barcelona, Beijing, Belfast, Bratislava, Brussels, Bucharest
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