Preventing market abuse – The EU regulatory landscape
The precarious cases of abuse in financial markets which gradually emerged with the unfolding of the 2007 financial crisis, led to believe that unless serious and robust measures were enforced, integrity and transparency within financial markets would be
The infamous LIBOR benchmark scandal is a stark reminder of the extent to which collusive behaviour was rife in order to manipulate the financial markets. This was a time where the possibility of investors losing trust in the markets was more than ever a reality, with the consequent systemic effect of companies failing to find the much-needed funding from markets, and also possible dire consequences for economies in general.
Within this scenario and given the changes which evolved in the financial landscape, including technological developments, and following the introduction of the first Market Abuse Directive some years earlier, the EU felt it was high time to update its legal framework and ensure market integrity and accountability are restored.
The new regulatory regime, the Market Abuse Regulation and Directive on Criminal Sanctions on Market Abuse, collectively known as MAD II, has been applicable as from 2016, with full transposition into Maltese Law materialising by the end of the same year. It provides for a more harmonised legal framework within EU members states, which is crucial to address market abuse across borders and markets. It also introduces a tough criminal and administrative sanctioning regime which should act as a serious deterrent to any form of market abuse.
Market abuse is a concept which is conducive to unlawful behaviour in financial markets in the form of insider dealing, unlawful disclosure of inside information or market manipulation. The MAD II regulatory regime digs further deep in the detail in order to clear any grey areas which may have emerged in the previous MAD.
Responsibilities are rigorously specified to ensure that all stakeholders involved are aligned to sustain market integrity via ethical behaviour, full transparency, avoidance of any conflicts of interest and accountability.
Obligations include, but are not limited to, transparent and ethical conduct by sellers of financial instruments whenever gauging the interest of potential investors prior to the announcement of a transaction, research analysts’ considerations and disclosures when developing and issuing investment recommendations, maintenance of insider lists and disclosure of inside information by listed entities.
Another critical aspect of the regulation requires trading venues, investment firms and also any other person professionally arranging or executing a transaction in a financial instrument to ensure the implementation of proper systems, controls and processes within their businesses to prevent, detect and report any form of market abuse.
Since entry into force of MAD II national competent authorities within EU member states have intensified their efforts to raise awareness of the new regime, which has resulted in an increase in the reporting of suspicious abuse by 130% in 2017 over the previous year, and a further increase of 4.5% in 2018. However it is to be acknowledged that while reporting has shown a sharp increase, NCAs are facing new challenges in staying ahead of the game given the rapid changes in technological developments in systems to access different financial markets, hence new emerging risks in behaviours to manipulate and abuse markets remain a serious threat.
The rate at which dynamic changes are affecting the global financial markets requires the EU to commit itself in ensuring that the market abuse regulatory regime remains relevant to this ever-changing financial landscape.
This commitment is being reflected in the European Commission’s present task to submit a report to the European Parliament and the Council to assess various provisions of MAR. Different aspects of the regulation are at present being considered in consultation with all stakeholders, including whether to extend the scope of MAR to FX spot contracts and the cross border enforcement of sanctions.
It will be interesting to see what effective changes this process will bring to the incumbent regulation in the foreseeable future.
Simon Xuereb MBA (Henley)