The Market Abuse Regulation is imminent: 7 things you need to know
01 July 2016
Last week I had the privilege of presenting at the EnergyRisk Summit 2016 on the topic of Market Abuse Regulation (MAR) and trader surveillance. Market abuse is a hot topic right now and many of our clients are reviewing the impact the Market Abuse Regulation (MAR) will have on their business.
The regulation goes live on Sunday, 3rdJuly 2016 and those who already comply with REMIT will find they have a head start. That said, there are some differences between REMIT and MAR which need to be considered during the design and implementation of your project. I take a look at some of the differences and the things you should be thinking about below.
What is MAR?
The Market Abuse Directive (MAD) has been in force for financial institutions since 2003 and is being updated as a result of a review commissioned after the financial crisis. The scope is widening to include Commodity derivatives, both financial and physical, and all financial instruments traded on MTFs1, OTFs and RMs will also be in scope. For many of you this will include trading of interest rates, FX derivatives, and Emissions. MAR, the new regulation, also includes updates to the definitions of market abuse and inside information and introduces the idea of whistleblowing, and publishing of insider lists and market soundings.
This regulation requires monitoring of market abuse to be embedded in your business and encourages the disclosure of market manipulation acts. You risk facing investigations, fines, and even reputational damage if you are found to be non-compliant.
To add to your workload, regulators are seeking to better understand how the market is addressing market abuse by requesting information from Market Participants. To respond to these enquiries you may need to sift through vast amounts of data and information, requiring significant investment of time and resources. It’s important to make sure you have appropriate people and systems/data management in place to respond to these requests.
How is MAR different to REMIT3?
- In scope instruments - REMIT’s scope only includes wholesale energy products2 whereas MAR includes most commodity contracts including spot commodity contracts. This means that many more market participants will need to implement practices to prevent market abuse from July 2016.
- Emission Allowances - For MAR you need to publicly disclose inside information concerning emission allowances, including any aviation or installations activities if you are above the predefined thresholds3. For REMIT, ACER does not consider emissions allowances as 'wholesale energy products' and therefore they are out of scope.
- Monitoring - For MAR it is necessary not only to monitor suspicious transactions, but also to monitor suspicious orders and manipulative behaviours.
- Disclosure of inside information by market participants - Both MAR and REMIT require inside information to be publicly disclosed by market participants. For REMIT you can share this information on your company website, however for MAR you will need to disclose inside information via a public forum, such as a regulatory authority’s website. The good news is that if you properly disclose inside information under MAR you will also satisfy the REMIT disclosure requirements.
- Disclosure of inside information by issuers - REMIT obligations only apply to wholesale market participants and not to issuers of financial instruments. For MAR, issuers also need to disclose inside information to their competent authority by disclosing it on their own website, ensuring it remains there for a minimum of five years.
- Increased market abuse scenarios - MAR builds on REMIT by introducing new market abuse scenarios and market governance processes which need to be addressed when designing your trade monitoring programme4.
- Criminal Sanctions and Fines - MAR has primacy over REMIT in relation to the imposition of criminal sanctions for market abuse and therefore criminal charges will be brought if the market manipulation or insider trading falls within the scope of both REMIT and MAD II.
What should you do next?
- Review and update your current market abuse governance. If you already have processes in place to monitor market manipulation activities for REMIT, these may need to be updated to capture the new MAR requirements.
- Review and update your current market abuse processes, systems and controls. You will need to make sure your compliance monitoring programme covers all in scope trading activity and will be sufficient to prevent market abuse as described in the new scenarios.
- Analyse emissions thresholds. Calculate whether you fall above the emission thresholds3, and if so, implement monitoring of your trading activity.
- Review and update processes for disclosure of inside information. MAR requires public disclosure of any inside information. You will need to review current inside information disclosure processes and make any necessary updates.
As the commodities trading market gets to grips with business as usual under yet another regulation, we will be sharing more blogs on trader surveillance and the prevention of market abuse. Sign up to our Commodities Management blog here to make sure you receive the latest updates.
- The term “MTF” - Multilateral Trading Facility - was introduced by MiFID II. It is a trading system that facilitates the exchange of financial instruments between multiple parties. Multilateral trading facilities allows eligible contract participants to gather and transfer a variety of securities, especially instruments that may not have an official market. These facilities are often electronic systems controlled by approved market operators or larger investment banks. Traders will usually submit orders electronically, where a matching software engine is used to pair buyers with sellers. http://www.investopedia.com/terms/m/multilateral_trading_facility.asp
- REMIT applies to trading in wholesale energy products, defined as the following contracts and derivatives: i) Contracts for the supply of electricity or natural gas where delivery is in the EU. ii) Derivatives relating to electricity or natural gas produced, traded or delivered in the EU.
- Emission allowance thresholds under MAR: (a) the minimum threshold of carbon dioxide (CO2) equivalent shall be 6 million tonnes a year; (b) the minimum threshold of rated thermal input shall be 2,430 MW.
- Examples of new market abuse scenarios include cross venue or cross product manipulation while new governance processes include whistleblowing, market soundings, and managers transactions.
- ‘Issuer’ means a legal entity governed by private or public law, which issues or proposes to issue financial instruments, the issuer being, in case of depository receipts representing financial instruments, the issuer of the financial instrument represented.