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Market Abuse Update

28 November 2014


In our May newsletter we provided an update on the progress and status of the European proposals to replace the existing Market Abuse Directive (MAD) with a Regulation on insider dealing and market manipulation (MAR) and the Directive on criminal sanctions for insider dealing and market manipulation (CSMAD). Both MAR (Regulation 596/2014) and CSMAD (Directive 2014/57/EU) were published in the EU Official Journal on 12 June 2014. 

MAR, as with all Regulations, shall have direct effect, and shall automatically apply to all Member States from 3 July 2016 completely replacing the MAD regime. In the UK, MAR shall replace Part VIII (Section 118ff) FSMA (Financial Services and Markets Act 2000) and the FCA’s MAR (Code of Market Conduct).   

In relation to CSMAD, Member States have two years to transpose the Directive into national law. As outlined in our previous PLC Update, the CSMAD requires Member States to ensure that criminal offences, as defined in the Directive, are punishable by “effective, proportionate and dissuasive” criminal penalties and sanctions. 

The CSMAD expressly provides for a maximum term of imprisonment of at least four years’ for insider dealing, recommending or inducing another person to engage in insider dealing and market manipulation and two years’ imprisonment for the unlawful disclosure of inside information. 

As we previously reported, the UK has opted out of CSMAD at the present time, and as such criminal offences relating to market abuse will continue to be covered by existing domestic UK law, (eg the Criminal Justice Act 1993 and the Financial Services Act 2012), albeit that there may be some changes made. 

The Chancellor of the Exchequer announced in his Mansion House speech (on 12 June 2014) that “we will introduce tough new domestic criminal offences for market abuse, rather than opt into European rules we do not think suitable or sufficient for our needs”. 

This article provides an update of MAR and looks at some of the key issues within the Regulation.

Scope of MAR

The new European rules on market abuse update and strengthen the framework provided by MAD, which will now be repealed. MAR does however, specifically move the regulatory environment forward in an attempt to keep pace with technological developments in the financial system. 

For example, the scope of MAD covered financial instruments admitted to trading on an EU regulated market (including prescribed markets in the UK). 

MAR has been extended to look beyond pure financial instruments and covers products such as algorithmic and high frequency trading (HFT), over the counter trading (OTC), as well as benchmarks such as LIBOR. 

MAR also extends its scope to include emissions allowances, as well as extending the market manipulation prohibition to instruments whose value relates to traded instruments (for example, MAR expressly recognises an OTC credit default swap). 

Key Issues

Market Abuse Offences

The offences for market abuse under MAR include those as under the MAD regime, being:

  • insider dealing
  • persuading others to engage in insider dealing
  • disclosing inside information, and
  • engaging in market manipulation.

MAR however, goes further and prohibits the following:

  • the use of inside information to cancel or amend pre-existing orders or bids
  • market manipulation to secure the price of financial instruments, related spot commodity contracts or auctioned products (emission allowances), at an abnormal or artificial level, and
  • providing false or misleading information in relation to a benchmark which manipulates the calculation of a benchmark.

In particular, MAR now prohibits “attempted market manipulation” as well as actual. 

For example, market manipulation will cover transactions and orders to trade, but also the cancellation or amendment, or the attempted cancellation or amendment, of an order to trade on the basis of inside information that is received subsequent to placing the order. 

Any attempted activity, where a transaction is intended for ‘abusive’ purposes, will be caught by MAR, even if the transaction is not actually executed.

The prohibition of market manipulation also includes the attempted or actual manipulation of benchmarks, as well as actual financial instruments, and the transmission of false or misleading information. 

MAR specifically states that dissemination of false or misleading information via the internet, including social media or unattributable blogs, is equivalent to doing so via more traditional communication channels and is also prohibited. 

Sanctions – Criminal and Administrative

Without prejudice to the criminal sanctions in the CSMAD, MAR provides for a set of administrative sanctions and other administrative measures that may include the possibility of imposing a ban from exercising management functions within investment firms, imposing a fine, a public warning including details of the person responsible for the infringement and its nature, or withdrawal or suspension of the authorisation of an investment firm.  

The possibility for Member States to impose both administrative and criminal sanctions for the same offence is confirmed in MAR.

Competent authorities will have discretion to vary the level of any administrative fines in accordance with the offence committed and the person involved. 

For example, infringement of the prohibition on insider dealing by a natural person may be up to EUR 5,000,000 compared with legal persons being fined up to EUR 15,000,000 or up to 15% of their turnover for the same offences. 

Definition of Inside Information

The definition of ‘inside information’ in MAR follows the definition used in MAD being:

  • information of a precise nature
  • which has not been made public
  • relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments, and
  • which if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.

MAR however, expands this definition further:

  • expressly stating that “an intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfies the criteria of inside information”, and
  • introducing a specific definition of inside information for emission allowances, as these are now classified as financial instruments within the scope of MAR.
Insider Lists

It is acknowledged that insider lists are an important tool for regulators, especially when investigating possible market abuse, but national differences in the data included in such lists results in unnecessary burdens on issuers listed in several jurisdictions. 

MAR seeks to harmonise EU wide content and format for insider lists and ESMA shall develop draft implementing technical standards to determine the precise format of insider lists and the format for updating insider lists referred to in Article 18 of MAR.

ESMA has proposed that standard template insider lists shall include details such as home landline numbers, personal mobile phone numbers, email addresses, date and place of birth of the individuals with access to inside information, date and time the person obtained access, date the insider list was drawn up and the date the person ceases to have access to inside information specifying the time and date when the change triggering the update occurred.  

ESMA is currently consulting on two types of insider list a general insider list and a deal specific or event based insider list.

The above information is an increase in the level of detail required under the UK’s current regime. The UK’s Quoted Companies Alliance (QCA) stated in a letter responding to ESMA’s consultation on possible implementing measures under MAR, that whilst the QCA agrees that it is of benefit for there to be a prescribed format of an insider list, it believes

that the information proposed by ESMA is far too detailed and will be burdensome for issuers to provide. The contents of such lists should be proportionate and take into the account the purpose for which insider lists are required. Furthermore, we believe that there could be data protection issues with the amount of information required to be kept by issuers and their advisers”. 

It is understood that a number of similar comments have been further submitted by representative bodies in the UK to ESMA in response to its Consultation Papers 808 (draft technical advice on possible delegated acts) and 809 (draft technical standards) concerning MAR.

ESMA shall submit the draft implementing technical standards required in respect of MAR to the Commission by 3 July 2015.

SME Growth Market Exemptions

The scope of MAR has been extended to include non-regulated markets, such as MTFs and OTFs. 

The Commission recognises that applying the MAR, in particular the requirement to disclose inside information and constantly update and maintain insider lists, will impose administrative burdens specifically on issuers on SME growth markets. 

As such, issuers whose financial instruments are admitted to trading on an SME growth market, (eg AIM in the UK), shall be exempt from drawing up, and maintaining, an insider list, provided that the following conditions are met:

  • the issuer takes all reasonable steps to ensure that any person with access to inside information acknowledges the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information, and
  • the issuer is able to provide the competent authority, upon request, with an insider list.

Arguably the second limb may result in the exemption for SME growth markets being ineffective, as such issuers may endeavour to maintain insider lists anyway to ensure they are able to provide an insider list in the event they are asked by the competent authority. 

Safeharbours and Exemptions

PDMR Dealings

In respect of disclosure of transactions in securities carried out by a person discharging managerial responsibilities (PDMR) and connected persons, it is proposed that the disclosure obligation be extended to apply to debt, equity and hybrid securities. 

A template for the disclosure notification is proposed in relation to PDMR dealings and notification to the company and any such disclosure to be made to the public.

MAR requires a close period of 30 days prior to the publication of half-year and annual results during which PDMRs cannot deal.  ESMA has suggested that the close period would only end upon the publication of a company’s full annual report and not a preliminary announcement. This differs from the current practice in the UK as set out in the UK Model Code.

In the UK, it is market practice for issuers to publish a preliminary announcement of annual results (containing information prescribed by the FCA’s Listing Rules) before publishing the year-end report. The rationale behind this being that it ensures that results are made publicly available as soon as possible, and as such is of benefit to the financial market as a whole. 

There are many reasons why it may not be possible to publish the year-end report at the same time as the preliminary announcement, including for example, the fact that it contains significantly more information, including information of a more narrative nature such as the corporate governance report.

It does not appear sensible, or beneficial to the market, to delay the publication of the preliminary announcement in order to be able to publish it at the same time as the annual report.

Under the FCA’s Model Code, it is the preliminary announcement that triggers the end of the close period because once the inside information has been published, there is no need to impose a prohibition on dealings. 

An inability to use a preliminary announcement as a trigger for the end of a close period would mean that the 30 day prohibited period would not properly match the period prior to the release of the results to the market, and would therefore impact on the purpose of the close period. It is hoped that ESMA will address such concerns in their MAR technical standards and advice.

Market Soundings

MAR introduces a detailed framework relating to ‘market soundings’ creating a defence to unlawful disclosure of inside information in certain circumstances.

MAR states that ‘market soundings' “comprises the communication of information, prior to the announcement of a transaction, 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…” by an issuer or a third party acting on behalf of or on the account of an issuer. 

The provisions relating to ‘market soundings’ create a defence to unlawful disclosure of inside information in respect of a person intending to make a takeover bid for the securities of a company or a merger with a company to parties entitled to the securities, as long as the conditions of MAR are satisfied.

There are numerous prescriptive conditions to be satisfied in order for the ‘market soundings’ defence to apply. 

For example, the disclosing party must:  

  • consider whether the market sounding will involve the disclosure of inside information, and make a written record if its conclusion, along with the reasons for such conclusion
  • inform the person receiving the market sounding that he is prohibited from using that information, or attempting to use that information, by cancelling or amending an order which has already been placed concerning a financial instrument to which the information relates
  • make and maintain a record of all information given to the person receiving the market sounding and keep that record for a minimum of five years.

MAR makes it clear however, that the person receiving the market sounding must assess for himself whether it is in possession of inside information or when it ceases to be in possession of inside information.  

ESMA is expected to issue regulatory technical standards in respect of the market sounding requirements.

It is understood that representative bodies, such as the MAR Joint Working Party of the Company Law Committees of the City of London Law Society (“CLLS”) and the Law Society of England and Wales, have responded to ESMA’s draft technical standards raising concern that the burden proposed to be placed on issuers by MAR” is disproportionate, costly on an ongoing basis, and impractically burdensome”, and in particular not enough consideration has been given to the different position of issuers and PDMRs in comparison to regulated firms. 

For example, in relation to the market soundings exemption, there currently is no distinction between the categories of disclosing market participants and issuers, who are not themselves regulated, who will be subject to the same requirements as a regulated firm under MiFID. 

For example, the requirement for regulated firms to have provisions and procedures in place including facilities to monitor and record telephone calls. 

If an issuer is conducting a market sounding on their own, and not as part of a group of advisors conducting a market sounding and without the involvement of a regulated firm, the issuer is unlikely to have recorded telephone lines and would therefore not be able to comply with the market soundings requirements. 

Representative bodies, such as the CLLS, are suggesting to ESMA that amendments be made to permit issuers, when conducting market soundings alone, to keep a written record of telephone calls rather than have audio recording facilities.  

It is also understood that requests are being made to ESMA to include the concept of a lead person in relation to a market soundings if there is more than one firm represented (eg on a conference call), whereby only that lead party would be required to make such a record.

As currently drafted it appears that the market soundings safe harbour will only be of practical use to brokers and other regulated entities.

Share Buy-Backs

MAR retains the exemptions included in MAD for share buy-back programmes and stabilisation measures. The ability for these exemptions to take effect is subject to certain strict requirements being met, including those set out below. 

Managers of investment trusts or similar corporate vehicles, who may commonly seek to buy-back shares from investors should be aware of this potential exemption. 

For example in relation to trading in own shares in buy-back programmes:

  • full details of the share buy-back programme must be disclosed prior to the start of trading
  • trades must be reported to the competent authority as being part of the buy-back programme and subsequently disclosed to the public as such, and
  • adequate limits relating to price and volume must be complied with.

For example, in relation to trading in own shares for stabilisation of a financial instrument:

  • the stabilisation must be carried out for a limited period
  • relevant information about the stabilisation must be disclosed and notified to the competent authority, and
  • adequate limits relating to price must be complied with.
Accepted Market Practices

The definition of market manipulation has been extended to include many different types of behaviour (refer to Article 12 of the Regulation for details of the non-exhaustive list), and as part of the maximum harmonisation approach under MAR the existing concept of accepted market practices (AMPs) is being phased out and removed. 

MAR contains a transitional provision that AMPs in existence prior to the date MAR comes into force may remain applicable for 12 months after that date.

Disclosure of Inside Information and Delayed Disclosure

Under MAR companies will be permitted to delay the disclosure of inside information to the public provided that all of the following conditions are satisfied:

  • immediate disclosure is likely to prejudice the legitimate interests of the issuer, or emission allowance market participant
  • delay of disclosure is not likely to mislead the public
  • the issuer, or emission allowance market participant, is able to ensure the confidentiality of the information. 

Where an issuer delays the disclosure of inside information under Article 17 of MAR, it will be required to provide notification to the relevant competent authority (eg the FCA) that disclosure was delayed and shall provide a written explanation of how the above conditions were met. 

Article 17 also states that “the issuer shall not combine the disclosure of inside information to the public with the marketing of its activities” and all inside information an issuer is required to disclose must be maintained on its website for at least five years.

ESMA Next Steps

The ESMA held an open hearing in Paris on 8 October 2014 on the two consultation papers it published in July this year:

  1. draft technical standards on MAR, and
  2. draft technical advice on possible delegated acts/implementing measures concerning MAR. 

We await information from the outcome of this hearing.

It should be noted that all draft regulatory technical standards are to be submitted by ESMA to the European Commission by 3 July 2015 and the finalised responses on draft technical advice by March 2015. 

The deadline for comments to ESMA on both consultation papers was 15 October 2014 and a number of comments have been submitted by representative bodies in the UK.


In summary, the new regulatory framework being imposed by way of MAR, and CSMAD:

  • establishes a harmonised regime of minimum criminal and administrative sanctions across all of the EU Member States
  • introduces offences of ‘attempted’ insider dealing and market manipulation, as well as ‘actual’, including the requirement to report suspicious orders or transactions, even if orders are not placed or executed
  • extends the scope of existing market abuse rules to include abuse relating to financial instruments traded on new categories of trading platform and OTC
  • prohibits market abuse occurring across spot commodity and commodity derivative markets, and in particular in relation to the application of inside information and insider dealing rules, and co-operation between financial and commodity regulators will be reinforced
  • explicitly bans the manipulation of benchmarks, such as LIBOR
  • introduces an EU-wide harmonised format for insider lists
  • contains new reporting obligations for listed companies in the event they delay disclosure of inside information and requirements for enhanced disclosure of own account transactions by PDMRs
  • contains prescriptive procedures and conditions in relation to potential safe harbours including for market soundings or share buy-back programmes
  • reinforces the investigative and sanctioning powers of regulators and authorities, including the enforcement of both civil and criminal sanctions, and
  • the deterrent effect of the legislation will be greater than it is presently, with the possibility of fines of at least up to three times the profit made from market abuse, or at least 15% of turnover for companies, with discretion for Member States to go beyond these minimum thresholds.

MAR entered into force on 2 July 2014 and shall apply from 3 July 2016.  All Member States must therefore have taken all necessary measures to ensure their national laws comply with MAR by that date.  

Issuers and their advisors should begin readying themselves for the new regime, albeit they should wait for the technical standards to be finalised in 2015 before updating policies and procedures.

The text of MAR (Regulation 596/2014) is available here.

This article was written by Mark Howard and Lucy Macpherson.

For more information, please contact Mark on the details above or Lucy on +44 (0)20 7203 5273 or lucy.macpherson@crsblaw.com