Market Abuse Regulation: Is It Fit for Purpose?
Trading platforms and stock markets in the developed economies are constantly striving towards maintaining an open, fair and competitive environment for all parties who chose to trade on them.
Without this integrity – and constant striving for health - a market risks becoming a venue for market manipulation, insider trading and other undetected criminal behaviour. Catherine Moss, corporate Partner at Shakespeare Martineau, explains for Finance Monthly.
Preventing behaviours amounting to market abuse, and tackling a lack of awareness of risk, has been central to the regulators’ quest for fairness for a number of years. So, following on from the July 2016 introduction of the Market Abuse Regulation (MAR), how is the UK faring and with a further review by the European Securities and Markets Authority (ESMA), what does the future hold?
Markets are driven, and develop depth, through pricing; and prices are – and have always been – vulnerable to manipulation. MAR, and its previous manifestations, were designed to identify behaviours which manipulated markets, or which allowed people to buy securities or commodities on a privileged basis with information which was not generally available to other trading parties.
The UK has had a legal framework around insider dealing and market abuse for a number of years. However, the introduction of MAR in 2016 formed a further part of a Europe-wide attempt at greater harmonisation, in response to scandals which came to light in the financial crisis and the greater complexity of the financial markets and emergence of alternative trading platforms. In the move towards a more congruent, European-wide, regime encompassing not only securities trading but trading in fixed income and commodity markets and related benchmarks, did the EU fulfil its markets’ needs? Leaving aside the question as to whether the latter could ever be achievable given the myriad trading venues now available, have market participants found the legislation fit for purpose?
The upcoming review of MAR will be undertaken by ESMA, looking into how well the regulations and directives are being implemented, whether the regime should be broadened, whether cross-market order book surveillance should be made subject to an EU framework; and, suggesting purposeful legislative amendments. Consideration is to be given to extending the regime to the foreign exchange markets. In addition, aspects of MAR which are still - unhelpfully - subject to specialist debate as to their scope, for example buybacks, insider lists and managers’ transactions, are to be further considered by ESMA.
At its simplest, there is a need to balance the desire of a company to access public money and trade its securities on a public platform against the requirement to adhere to the rules which apply to that market and its participants. It is crucial to the health of a market to ensure that information which may unfairly disadvantage other parties is not only managed securely but released in accordance with that market’s rules. Julia Hoggett, Director of Market Oversight at the FCA, put it starkly: “The life blood of all well-functioning markets is the timely dissemination of information, without which effective price formation cannot take place. The malignant form of that same life blood is the misuse or inappropriate dissemination of that information.”
However, as companies and their advisers know, market abuse legislation - whether EU or local - has been traditionally quite complicated and tricky to comply with. As the recent survey results from the Quoted Companies Alliance (QCA) demonstrates, issuers and their advisers have exhibited a broad range of responses to legislation which is meant to direct efforts to maximum harmonisation. However, these requires additional processes and procedures to be put in place, understood and adhered to.
Lack of certainty as to the MAR requirements, for example, on the duration of closed periods, is striking. The FCA has quite rightly observed that “awareness is not present in all market participants.” Given the FCA’s stated objective of making effective compliance with MAR a state of mind - at least amongst the community it regulates - it must be asked how this is to be achieved within the current, or future, legislative framework where achieving certainty as to the meaning of the legislation appears difficult.
Clearly, with the introduction of any new regulation, some companies and issuers adapt faster than others, particularly if they are larger and better resourced. It is obvious from the QCA’s survey results, however, that many smaller and mid-size issuers are still navigating MAR’s complex requirements hesitantly. But more worryingly, it can be seen from the pattern -and lack - of regulatory announcements that some issuers, particularly in less obvious and well-policed trading venues, seem not to have recognised the breadth of its application. Education clearly is key and greater regulatory and market promotion of the constraints which issuers are to work within is to be encouraged.
With the introduction of any new regulation, some companies and issuers adapt faster than others, particularly if they are larger and better resourced.
So, what should be done to ensure that the requirements of MAR become part of an issuers “state of mind”? Effective regulatory response can seem sometimes to be limited to the publication of extensive decision notices which are picked over by advisers, keen to ensure that practical examples of poor behaviour, or the failure of systems, can be relayed as precautionary horror stories to their clients.
Many issuers seek regular training sessions with their advisers or company secretaries and become more confident as the reporting and transactional cycle demands their attention. Others find it difficult to engage in the processes required. Some, however, are not well-served by the advisers operating in the market and sector within which they trade. The FCA appears keen to seek to educate all issuers but, inevitably, issuers are still tripping up as they fail to understand, or to take advice on, the requirements of the regulatory framework within which they operate.
Whilst the ESMA review of MAR is unlikely to change the regime substantively, some regulatory time should be devoted to tailoring it more expressly to an issuer’s needs and securing a greater measure of awareness. Whilst the regulatory burden is unlikely to be lessened, clarity of approach together with greater support from markets and trading platforms as to the implications of MAR to their issuers would be welcome.