It’s bigger. It’s tougher. It’s coming into effect on 3 July 2016. It’s the new Market Abuse Regulation (MAR). MAR widens greatly the scope of instruments and actions subject to anti-market abuse regulations. It also creates a new regime to govern market soundings, and imposes tough new obligations on regulated firms. We talked through the MAR journey and discussed how it might affect firms.

1. Old Problems, New Markets
Market Abuse Regulation (MAD II)
Alex Fahy and Miles Kellerman
May 2016

2. 2
Markets and misconduct – Diversification and Proliferation

3. 3
Old problems
• The Commission’s has been consulting on this since 2010.
• In 2010, the commission highlighted some of the problems it was finding in
relation to the variation of approach across the continent;
• What it amounts to is keeping new markets clean
• The purposes of MAR are;
o To harmonise standards across the EU
o To define acceptable market conduct
Authorisation 6 Member States - no possibility to withdraw an individual’s
authorisation for Market abuse
Management Sanction 15 Member States - no ability to disqualify/dismiss management
and/or supervisory body in cases involving market manipulation
Penalties 4 Member States - maximum fines of 200 000 euro or less
Definition “A concept that encompasses unlawful behaviour in the financial
markets and, for the purposes of this Regulation, it should be
understood to consist of insider dealing, unlawful disclosure of
inside information and market manipulation”

4. 4
Scope - Overview
• MAD II and MAR represent an expansion of the scope of market
abuse regulation
MAD (Current UK MAR) EU MAR
Activity Behaviours (for some
‘behaviours’ orders are
specifically included, for
others only trades are
caught)
Trades, Orders &
‘Behaviours’
Securities Qualifying investments Securities, benchmarks,
commodities (spot)
Venue Prescribed Markets Exchanges, MTFs,
OTFs and Auction
Platforms

5. 5
Scope – Activities and behaviours
• Key changesType of
Behaviour
• ‘qualifying investments’ replaced by ‘financial instruments’ (not spot)
• Specifically includes cancellations and amendments
• Knowledge test is now ‘knows or ought to know’
Insider Dealing
• Applicable to ‘persons’ not just insiders
Unlawful
Disclosure
• Entering into a transaction, placing a trade ‘or any other behaviour’
Manipulating
Transactions
• 'Entering into a transaction, placing a trade ‘or any other behaviour
Manipulating
Devices
• ‘qualifying investments’ > ‘financial instrument, a related spot
commodity contract or an auctioned product based on emission
allowance’
Dissemination
• No direct comparator in EU MAR – But… ‘Any other Behaviour’
Misleading
Behaviour
• New - ‘transmitting false or misleading information or providing
false or misleading inputs… or any other behaviour ‘
Benchmark
Manipulation

6. 6
The manipulation offences - ‘Any other behaviour’
• This new element has been explicitly included to catch misconduct
relating to;
o One product traded in multiple venues
o An underlying financial instrument whose price or value affects a
derivative
• ESMA refer variously to ‘Cross-Market’, ‘Cross-Asset’ and ‘Cross-
Venue. ESMAs guidance illustrates;
• Cross-product
o ‘The manipulation of the price of a financial instrument traded in a
regulated market in order to influence the price of a CDS’
• Cross-venue
o ‘False indications of interests displayed in an electronic bulletin board on
a specific financial instrument that is also traded in a regulated market’
o Key Takeaway – Does your activity in one market or product have
the potential to affect business in a related market or product

7. 7
Inside information
MAD I Definitions
• Precise – typically relating to a specific event
• Price Sensitive – capable of having an effect
on price of a security
• Non-public – not published or heavily
rumoured

8. 8
Insider trading
Criminal Market Abuse
‘Civil’ Market Abuse
Acting as a
Prosecutor
Acting as a
Regulator

9. 9
Insider trading
Area Current Incoming
Knowledge
Information obtained ‘which
he knows, or could
reasonably be expected to
know, is inside information’
‘Knows or ought to know’
Security
Qualifying
Investments
Financial
Instruments
Act
Dealing or
attempting to deal
Dealing, attempting to
deal, amending or
cancelling an order

10. 10
Insider lists – ‘Over the Wall’

11. 11
Thematic findings – Information barriers
• Employees need to understand their role in controlling
information flows
• Firms and senior management had identified and considered the
main risks but they were not doing enough to manage them
• “We expect to see business heads acting in a supervisory
capacity taking responsibility for controlling flows of information,
with appropriate challenge and monitoring from the second and
third lines of defence”
• Firms should place the assessment of circumstances that could
present heightened …risks at the centre of their ongoing risk
assessment

12. 12
Insider lists – Required Content
Old New
Identity of each
person having
inside information
Job title Work direct number
Reason for being
on list
National ID number D.o.B.
Date list
created/updated
Deal specific v General Personal telephone no
Date and Time
information
obtained
Date list created Home address
Reason

13. 13
Market soundings
The FCA has long been interested in regulating market soundings…
Conductor
of market
sounding
Potential
investor
Inside
information

14. 14
Market soundings: The new requirements
Conductors
 Obtain permission
 Keep records
 Provide documentation
Recipients
 Evaluate information
 Keep records
 Train staff

15. 15
Designating a market sounding recipient
Group v. Individual: Should I assign the
responsibility to an individual or an entire
team?
Training: Is my designated recipient(s) properly
trained, and do they understand their
responsibilities?
Organisational Design: How do I ensure that
the organisation of my firm ensures proper
compliance with the market sounding regime?

16. 16
Managers’ transactions
Persons Discharging Managerial Responsibilities (PDMRs)
 Manager or Senior Executive of an Issuer that:
1. Has regular access to inside information; and
2. Has managerial decision-making power
Spouse
Dependent
Children
Relatives in the
Household
Trusts, Companies
Associated Persons

17. 17
Managers’ transactions: MAR requirements
Threshold: €5,000
Reporting: three business days, concurrent
Restrictions: 30 days prior to
interim and year-end reports
PDMR/Associated Person to Firm
Firm to FCA
Day 1 Day 2 Day 3

18. 18
Surveillance systems for detection of abuse
1. Market manipulation: past and present
2. Common manipulative trading practices
3. MAR’s new requirements
• Surveillance systems
• Necessary capabilities
• Practical considerations

19. 19
Market manipulation in the past
Manipulation is as old as the markets themselves…
 Until the 1960s, information about
stocks was transmitted via ticker
tape.
 ‘Painting the tape’ manipulated the
ticker to give the appearance of
activity in the market
 The activity elicited a response,
resulting in a change of price that
could be taken advantage of

20. 20
Manipulative trading practices outlawed by MAR
 Spoofing (one side of trade)
 Layering (two sides of trade)

21. 21
Abusive behaviour by trading venues
Market abuse can also be committed by trading venues…

22. 22
Systems for detection of abuse
System for detection Training
Suspicious transaction and
order reports

23. 23
Detection systems: Necessary specifications
Analysis: each and every order and transaction
inside and outside trading venues
Alerts: notifies staff of potential abuse
Playback: every analysis (and trade/order data)
employed to investigate suspicious activity in the
last five years, regardless of STOR submission

24. 24
Detection systems: Practical considerations
Will my system need to be automated?
How do I set the correct parameters
for my alerts?
I’m a small firm—do I have the same
requirements?

25. 25
Takeaway questions
Am I subject to MAR (II)?
NoYes
Relax and grab another
bacon sandwich/ glass
of wine…
Ask yourself:
• Do I need to make any changes to
my system or procedures?
• What areas of my business pose a
compliance risk?
• Are my employees properly trained
and informed?