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Transcript of Market abuse e book
The Netherlands | Singapore | Germany I UK I USA
Date:
Author:
January 2016
Double Effect
Market AbuseAn introduction – Free e-book
Content
2Market Abuse - an introduction (c) double effect 2016
IntroductionChapter 1 3
The main elements of MAD IIChapter 2 7
Accepted behavioursChapter 3 16
Prevention and detection of market abuseChapter 4 18
Supervisory powers and sanctionsChapter 5 25
1. Introduction - MAD: in the beginning
There is new legislation on the horizon: the Criminal Sanctions for Market Abuse Directive (CSMAD) and the
Market Abuse Regulation (MAR), together called MAD II. With the entry into force on 3 July 2016, MAD II is
getting close. Because of this, it is necessary to assess the regulation and its impact on your firm.
Background of MAD:
In 2003, the first Market Abuse Directive (MAD I) introduced rules on market abuse, which encompasses
insider dealing, the misuse of inside information and the manipulation of market prices through practices such
as dissemination of rumours. In June 2014, the final texts of MAD II were published in the Official Journal of
the EU. MAD II intends to address shortcomings of MAD I by broadening the scope of the regime in several
ways. The aim of the new regime remains unaltered: to ensure the integrity and transparency of EU financial
markets.
This e-book aims at giving an introduction into the rules of MAD II, the areas of impact, timelines, the
implications for individual firms and finally it will provide some suggestions on how to prepare for
compliance.
3Market Abuse - an introduction (c) double effect 2016
1. Introduction - Objectives of MAD I
4
Harmonization
› Harmonized regime of
insider dealing and market
manipulation regulations
Inside Information
› Elaborated rules on
disclosure and publication
of inside information
Supervision
› A minimally harmonized set
of supervisory and
investigatory powers
Ensure integrity and transparency of EU financial markets
Market Abuse - an introduction (c) double effect 2016
1. Introduction - Drivers behind MAD II
Why was MAD II created?
Financial crisis
› A general response to
the crisis has been to
review and, where
necessary, amend the
existing financial
regulatory regime
Evolving markets
› Need to keep up with
market developments
(e.g. trading on MTF
and OTF), and
technological
developments (e.g.
HFT)
Need for further
harmonization
› Under MAD I, sanctions
could be avoided by
taking advantage of
differences in laws and
regulations between the
Member States. Further
harmonization should
prevent regulatory
arbitrage
Strengthening the
sanctions regime
› One of the post-crisis
conclusions by
regulators has been
that there is an
increased need for
deterrence of abusive
practices
5Market Abuse - an introduction (c) double effect 2016
1. Introduction - Timeline
Expected timeline for MAD II (MAR and CSMAD)
6Market Abuse - an introduction (c) double effect 2016
Jan.
2016
2 Feb.
2015
MAR and delegated
acts apply:
Firms must be
compliant
Commission prepares
and adopts the
implementing acts
MAR and CSMAD
officially published
12 Jun.
2014
3 Jul.
2016
CSMAD transposed into
national law and
application of measures
Sep.
2015
Jul.
2015
Extension of deadline of
the technical standards
to Sep. 2015
28 September 2015
final RTS published by
ESMA
2. Main elements of MAD II - Market Abuse
Schematic overview
7Market Abuse - an introduction (c) double effect 2016
Inside Information
Market Abuse
Unlawful
disclosure of
inside
information
Insider
Dealing
Market
Soundings
Legitimate
Behaviour
Accepted Behaviour
Market
Manipulation
Public
disclosure of
inside
information
Accepted
Market
Practices
1 2 3
Information of a precise
nature which has not been
made public relating directly
or indirectly to one or more
issuers or one or more relevant
instruments which, if made
public would have significant
impact on the price of those
instruments
2. Main elements of MAD II - Inside information
Inside information
› Further criteria concerning the definition of inside
information in relation to commodity derivatives
› Information relating to emission allowances and
related to auctioned products included
› Intermediate step in protracted process can also be
deemed inside information (e.g. state of contract
negotiations)
› Reasonable Investor test included in the regulation
allowing for broader interpretation than under MAD I
New to MAR
8Market Abuse - an introduction (c) double effect 2016
Definition of Inside information serves as the basis for the Insider Dealing and
Unlawful disclosure of inside information offences
Central definition to market abuse offences
Insider dealing
A person possessing inside information uses that information by:
› Acquiring or disposing of financial instruments to which that
information relates
› Canceling or amending an order concerning a financial instrument to
which that information relates
› Submitting, modifying or withdrawing a bid in relation to the auction of
emission allowances or auctioned products based thereon
2. Main elements of MAD II – Insider Dealing
1
Scope
Applies to any person who possesses inside information as a result of:
› Being a member of the administrative, management or supervisory bodies of
the issuer.
› Having a holding in the capital of the issuer.
› Having access to the information through the exercise of employment,
profession or duties.
› Being involved in criminal activities.
› And any person who possesses inside information where that person knows
or ought to know that it is inside information.
9Market Abuse - an introduction (c) double effect 2016
Scope
2. Main elements of MAD II - Insider Dealing
New to MAR
Insider dealing1
10
New to MAR
› Recommending or inducing others to engage in insider dealing
is prohibited.
› Acting on those recommendations or inducements amounts to
insider dealing if the person who acts knows, or aught to know
that it is based on inside information.
› Cancelling or amending an order can amount to insider
dealing.
Market Abuse - an introduction (c) double effect 2016
Unlawful disclosure of inside information
Unlawful disclosure of inside information arises when a person possesses
inside information and discloses that information to any other person
2
Scope
Applies to any person who possesses inside information as a result of
› Being a member of the administrative, management or supervisory bodies
of the issuer.
› Having a holding in the capital of the issuer.
› Having access to the information through the exercise of employment,
profession or duties.
› Being involved in criminal activities.
› And any person who possesses inside information where that person knows or
ought to know that it is inside information.
11Market Abuse - an introduction (c) double effect 2016
Scope
2. Main elements of MAD II – Unlawful disclosure of inside information
Unlawful disclosure of inside information2
12
New to MAR
› Market abuse now explicitly encompasses the offence of
unlawful disclosure of information.
› Onward disclosure of mentioned recommendations or
inducements can also amount to unlawful disclosure of inside
information where the person disclosing the recommendation
or inducement knows of or ought to know that it was based on
banned inside information.
Market Abuse - an introduction (c) double effect 2016
2. Main elements of MAD II – Unlawful disclosure of inside information
New to MAR
Market manipulation
Market manipulation is the practice of interfering in the free and fair operation
of a market to create a misleading impression in an attempt to gain a market
advantage.
2. Main elements of MAD II – Market Manipulation
3
Scope
The scope of market manipulation is extended in several ways. These are best
explained by the differences with MAD I on the next page.
13Market Abuse - an introduction (c) double effect 2016
Scope
2. Main elements of MAD II – Market Manipulation
Market manipulation3
14
New to MAR
› Manipulating benchmarks, particularly by transmitting false or
misleading information or providing misleading inputs where
the perpetrator knows or ought to know that the information or
inputs are false or misleading.
› Attempted market manipulation is now prohibited.
› Market manipulation rules now extend to spot commodity
contracts.
› Placing, cancelling or modifying orders to manipulate supply,
demand or price is now prohibited.
› A non-exhaustive list of indicators and example practices are
provided in ESMA’s Technical Advice.
Market Abuse - an introduction (c) double effect 2016
New to MAR
2. Main elements of MAD II – Exemptions
Buy-Back & stabilisation
Market Abuse - an introduction (c) double effect 2016 15
Relevant for Member States, members
of the ESCB, a ministry, agency or SPV
of a Member State.
Exemption
Monetary and public
debt management
Buy-back programsExempted from Insider
dealing and Market
Manipulation
Scope
New to MAD II: Comparable to MAD I, but conditions in more detail.
Relevant for issuers
Relevant for issuers, offerors or other
entities undertaking the stabilisation.
Exempted from the
whole of MAR
Stabilisation
3. Accepted Behaviour
Schematic overview
16Market Abuse - an introduction (c) double effect 2016
Inside Information
Market Abuse
Unlawful
disclosure of
inside
information
Insider
Dealing
Market
Soundings
Legitimate
Behaviour
Accepted Behaviour
Market
Manipulation
Public
disclosure of
inside
information
Accepted
Market
Practices
4 5 6 7
Unlawful disclosure of inside information
Legitimate Behaviour
› A number of
recognised legitimate
behaviours do not
constitute insider
dealing.
Market Soundings
› There are special
requirements for
interaction and
communication prior
to the announcement
of a transaction, in
order to gauge the
interest of potential
investors
› The detailed
framework for market
soundings is new to
MAR.
Public disclosure of
inside information
› Issuers are required to
inform the public as
soon as possible of
inside information.
Accepted Market
Practices
› The person entering
into a transaction,
placing an order to
trade or engaging in
any other behavior
has to establish that
this transaction, order
or behavior has been
carried out for
legitimate reasons
and conform with an
accepted market
practice.
Insider Dealing Market Manipulation
17Market Abuse - an introduction (c) double effect 2016
3. Accepted Behaviour
Oversight of accepted behaviour per market abuse category
4 5 6 7
4. Prevention and detection of market abuse
18
Insider lists
› MAD II renews and revises
insider lists. Also, such lists
may serve issuers or such
persons to control the flow of
inside information and thereby
help manage their
confidentiality duties.
1
Market Abuse - an introduction (c) double effect 2016
3 important themes
Organizations will have extended responsibilities in preventing and detecting market abuse.
Internal systems and
procedures
› Market operators and
investment firms that operate a
trading venue shall establish
and maintain effective
arrangements, systems and
procedures aimed at
preventing and detecting
insider dealing, market
manipulation and attempted
insider dealing and market
manipulation.
3
Manager’s transactions
› Greater transparency of
transactions conducted by
persons discharging
managerial responsibilities and
persons closely associated
with them. This is valuable for
both market participants and
competent authorities.
2
Insider lists
Issuers or any person acting on their behalf shall:
› Draw up a list of all persons who have access to inside information and
are under employment or otherwise performing tasks.
› Update the insider list promptly in case of certain changes.
› Provide the insider list to the competent authority as soon as possible
upon its request.
4. Prevention and Detection of Market Abuse – Insider Lists
1
Scope
Applies to:
› Issuers who have requested or approved admission to a Regulated Market.
› In the case of instruments only traded on an MTF or OTF: Issuers who have
approved trading of their financial instruments on an MTF or OTF, or have
requested trading on an MTF.
› It also applies to emission allowance market participants.
19Market Abuse - an introduction (c) double effect 2016
Scope
4. Prevention and Detection of Market Abuse – Insider Lists
Content
Insider lists 1
20
Content
› Identity of any person having access to inside information.
› The reason for including that person on the list.
› The date and time at which that person obtained access to
inside information.
› The date and time at which the person ceased to have access
to the information.
Market Abuse - an introduction (c) double effect 2016
Manager’s transactions
Persons discharging managerial responsibilities, as well as persons closely
associated with them shall notify the issuer and the competent authority of
every transaction conducted on their own account relating to the shares
or debt instruments of that issuer.
4. Prevention and Detection of Market Abuse – Manager’s transactions
2
Scope
› Applies once the total amount of transactions has reached the threshold of
€ 5000,- .
› Applies to issuers who have requested or approved admission of their
financial instruments to trading on a regulated market or an MTF, or have
approved trading on an OTF.
21Market Abuse - an introduction (c) double effect 2016
Scope
4. Prevention and Detection of Market Abuse – Manager’s transactions
Content
Manager’s transactions2
22
Content
› Name of the person.
› Reason for notification.
› Name of relevant issuer or emission allowance market
participant.
› Description and identifier of the financial instrument.
› Nature, date and place of transaction.
› Price and volume of transaction.
Market Abuse - an introduction (c) double effect 2016
Internal systems and procedures
› Market operators and investment firms that operate a trading venue shall
establish and maintain effective arrangements, systems and procedures
aimed at preventing and detecting insider dealing, market manipulation
and attempted insider dealing and market manipulation.
› Any person professionally arranging or executing transactions shall
establish and maintain effective arrangements, systems and procedures
to detect and report suspicious orders and transactions.
.
4. Prevention and detection of market abuse: Internal systems and
procedures
3
Scope
› Market Operators and Investment Firms operating a trading venue.
› Any person professionally arranging or executing transactions.
23Market Abuse - an introduction (c) double effect 2016
Scope
4. Prevention and detection of market abuse: Internal systems and
proceduresContent
Internal systems and procedures3
24
Content
› Automated surveillance systems: Dependent upon size,
nature and activities of the entity concerned. If there’s little
contact between client and front office, an automated system
will need to be in place.
› Training: ESMA emphasizes the importance to train all
relevant staff in the detection of market abuse. There should
always be an element of human analysis in detecting market
abuse.
› Reporting obligation: In case of reasonable suspicion of
insider dealing, the person shall notify the competent authority.
› Record keeping: Suspicious Transactions and Other Reports
(STORs) need to be kept for a period of 5 years.
Market Abuse - an introduction (c) double effect 2016
4. Prevention and detection of market abuse
25
General Information
› Name of individual
› Name of firm/trading venue
› Position within entity
› Address of reporting entity
› Acting capacity of entity with
respect to suspicious activity
› Type of activity of trading desk
involved (if available)
› Relationship with subject of
suspicion
› Contact/Compliance officer
Market Abuse - an introduction (c) double effect 2016
Reporting and Record Keeping
Suspicious Transactions and Other Reports (STORs) need to be kept for a period of 5 years.
Description of suspected
breach
› Describe activity, how it came to
reporters attention and reasons for
suspicion.
› For OTC derivatives, details
concerning transactions/orders in
the underlying asset and information
on possible link between dealings in
the cash market of the underlying
and dealings in the OTC derivative.
› For instruments admitted to trading
on/traded on a trading venue,
describe suspicious order book
interactions/transactions.
Transaction information
› Date and time of suspicious activity
(specify time zone)
› Market (trading venue where the
activity occurred)
› Location (country, if available)
If outside a trading venue:
› Specify transaction reference
number/order reference number
› Settlement date
› Name and type of security (ISIN)
MADII
MAD
26
MAD I failed to harmonize supervisory powers and sanctions
› MAD I implementation differed per regulatory regime.
› Competent authorities were left with a tool kit that was not equipped to deal
with changes in the market landscape after MiFID.
› Due to lack of harmonized powers and possibility to sanction disruptive
behaviour, the intended goals of MAD could not be achieved.
› MAR introduces increased investigatory powers for competent authorities like
the possibility to seize documents and access to recorded telephone
conversations.
› MAR requires member states to introduce administrative sanctions.
› CSMAD requires member states to implement criminal sanctions for serious
cases of market abuse.
MAD II mandates an increase in investigatory powers and sanctions
I
Market Abuse - an introduction (c) double effect 2016
Increase in investigatory powers and sanctions
5. Supervisory powers and sanctions: MAD I compared to MAD II
27
Possible Administrative Measures and Sanctions
› Ban from exercising management functions within investment firms.
› Natural persons may be fined €5.000.000,- for infringement of prohibition
insider dealing or market abuse.
› Legal persons may be fined €15.000.000 or up to 15% of their turnover for
infringement of prohibition insider dealing.
› At least four years of imprisonments for market manipulation, insider dealing
and recommending or inducing another person to engage in insider dealing.
› Two years of imprisonment for the unlawful disclosure of inside information.
› Other “effective, proportionate and dissuasive” sanctions are also allowed.
Possible criminal sanctions
Market Abuse - an introduction (c) double effect 2016
Increase in administrative measures and possible criminal sanctions
5. Supervisory powers and sanctions: Sanctions
5. Supervisory powers and sanctions: STORs
The AFM (NL) procedure for STORs is described below
28
Start STOR Close
STOR is enriched with
information available
to AFM. Request for
information send out
Discuss possible
handover for criminal
measures with public
prosecutor
Based on first
assessment decision
is made on follow up
of STOR
Further investigation
and write up of finding
plus proposed
measures
Administrative
measures prepared by
AFM staff and vetted
by AFM legal
Sanctioning by AFM
and possible appeals
of administrative
measures
Market Abuse - an introduction (c) double effect 2016
Want to learn more?
Follow our training course!
29Market Abuse - an introduction (c) double effect 2016
› During our MAD II training course all the elements of
MAD II will be discussed in much more detail and a
much closer look will be taken on the impact on
firms. The training course is very suitable for anyone
involved in MAD II in his work. This varies from sales
employees to operations and compliance staff. And
also project managers and business analysts
responsible for the implementation of MAD II.
› For more information and registration visit our
website:
http://www.doubleeffecttraining.com/
Want to know more?
Please contact our MAD II experts
30Market Abuse - an introduction (c) double effect 2016
The Netherlands
Crown Building South
Hullenbergweg 361
1101 CP Amsterdam
Singapore
20 Collyer Quay #23-01Singapore 049319
United Kingdom
99 Bishopsgate, Level 15EC2M 3XD, London
USA
212 South Tryon Street, Suite 980
Charlotte, NC 28281
Joris Hillebrand
› Practice Lead
› +31 6 116 495 65
Kimberley van Til
› Lead Consultant
› +31 6 531 459 04
Willem den Blanken
› Consultant
› +31 6 151 664 36
Rick Bonhof
› Consultant
› +31 6 461 844 07
Disclaimer
This document has been prepared by Double Effect and is solely intended to provide general information about the Market
Abuse Directive II (MAD II). The information in the document is strictly proprietary, unless otherwise stated and is being supplied
to you solely for your information. The document is informative in nature and does not constitute legal, regulatory or other
advice nor does it express any recommendations and may not be used for such purposes. Everyone using this document
should acquaint themselves with and adhere to the applicable legislation. No reliance may be placed for any purposes
whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness,
accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of Double Effect, or any of its
directors, officers, affiliates or employees as to the accuracy or completeness of the information contained in this document. No
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31Market Abuse - an introduction (c) double effect 2016