Market Abuse Regulation

Preparing for Brexit’s Impact on Capital Market Operations in the United Kingdom

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Overview

The United Kingdom made headlines when it voted to leave the European Union in June 2016. Popularly named “Brexit”, the move began a tumultuous four-year voyage that seemingly came to completion on January 31, 2020 when the UK’s withdrawal became official. However, as many are coming to realise, the nation is just now beginning to face some of its biggest challenges yet.

While the UK may be officially out of the EU, the European Union Withdrawal Agreement Act of 2020 (EUWA) called for a transitory implementation period that will end on December 31st of this year. Until that deadline, the UK will largely be treated as a Member-state of the EU while trade negotiations are underway. However, the agreement period largely prevents an extension beyond the fast-approaching 11-month deadline, making this the country’s last chance at striking a satisfactory trade deal with the EU.

The EUWA currently provides that directly applicable and operative EU laws such as the Market Abuse Regulation, the Transparency Directive, and the Prospectus Regulation will be converted into UK law at the end of the year. However, this does not amount to a workable level of certainty, in that such regulation, once converted, would be exposed to domestic revision or amendment.

Impact on Capital Market Regulation

The potential failure to achieve a trade deal presents particularly significant issues concerning, firstly, the “passporting” system (i.e. the system that enables banks and financial services firms that are authorised in any EU or EEA state to trade freely with minimal regulatory oversight – thereby serving as the foundation of the EU single market for financial services) and, secondly, the creation of a new EU Capital Markets Union, of which the UK has traditionally been a strong supporter.

More specifically, the UK will no longer be a part of the EU’s single-market system and will be treated as a third-party country lacking passporting or equivalence rights in the EU. This could be detrimental to both the EU, who relies on UK’s economic activity to bring revenue into the EU, and for the UK, a hub for international transactions instigated by firms that capitalise on the minimal red-tape requirements made possible by the Capital Markets Union. Abdication of the passporting and equivalence practices in the UK could particularly affect instances where there are lower numbers of retail investors in more than one Member State, as individual approvals would be required in each such Member State due to the absence of said practices.

What Practitioners Need to Know

As it stands, the presumption is that the UK will be considered a third-party country at the end of the implementation period. Consequently, some UK firms with operations in the EU are relocating to EU member-states (or are considering doing so) in order to preserve their passporting rights. EU regulators and supervisors are monitoring this activity, and it is important for professionals at every level to stay updated on the various guidelines and resources released by authorities to assist practitioners during the transition period.

With the potential failure to achieve a free trade deal still on the table, businesses and their advisors need to be prepared to reckon with its consequences. For example, the European Central Bank has been pressuring banks to accelerate their Brexit strategy plans and implement a substantial portion of its policies by the time the withdrawal deadline occurs. If firms cannot rely on regulatory equivalence, firms may have to incur significant costs that could affect their financial stability, hence why they should be considering potential mitigating mechanisms to counteract such effects.

Furthermore, on February 4, 2020, the Statutory Auditors and Third Country Auditors published their regulatory amendments to address deficiencies of retained EU law arising from the withdrawal of the UK from the EU in relation to the regulatory oversight and professional recognition of statutory auditors and third country auditors in the UK. In addition to updating the adequacy standards of nations such as China and South Africa, the amendments also provided an assessment framework for the equivalence of third countries’ audit regulatory frameworks and enabled the audit exemption currently available to subsidiaries of UK and EEA parent undertakings to continue to be available to those subsidiaries where their financial years have already begun.

While players across the board are giving their best efforts to deliver a smooth and fair transition of the UK out of the EU, only time will tell how complicated and contentious the terms of such transition will be. With or without a free trade arrangement, it is especially important for financial professionals, attorneys, and other advisory professionals to be vigilant in their assessment of regulatory developments as they are released.

ESMA 2018 Regulatory Work Program

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On February 8, the European Securities and Markets Authority (“ESMA”) published its 2018 regulatory work program, which provides a detailed breakdown of the individual work streams outlined in the 2018 work program. The areas covered in the regulatory work program include the following initiatives: European Social Entrepreneurship Funds (EuSEF) Regulation, European Venture Capital Funds (EuVECA) Regulation, EMIR, MiFID II, Market Abuse Regulation (MAR), Securities Financing Transactions Regulation (SFTR) and Proposed Regulation establishing a framework for the recovery and resolution of central counterparties (CCPs).

The 2018 regulatory work program can be found here.

ESMA has Published a Further Version of its Q&As on the MAR

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The European Securities and Markets Authority (“ESMA“) published a further version of its Q&As on the Market Abuse Regulation (“MAR“) on November 21, 2017.

The two new questions and answers are on the following topics:

  • ESMA states that the insider dealing prohibition in Article 14 of MAR applies during closed periods referred to in Article 19(11) of MAR in the same way as it does at any other time. Therefore a person discharging managerial responsibilities (“PDMR“) must also comply with Article 14. When an issuer allows a PDMR to trade under Article 19(12) of MAR, the PDMR must always give consideration as to whether or not the relevant transaction would constitute insider dealing.

ESMA states that the types of transaction by a PDMR prohibited during a closed period under Article 19(11) of MAR are the same as those types of transaction subject to the notification requirements set out under Article 19(1) of MAR, although Article 19(11) of MAR only applies to a PDMR when conducting transactions on its own account or for the account of a third party, whereas the notification of transactions required under Article 19(1) of MAR also applies to persons closely associated to a PDMR.

ESMA Issues Final Guidelines on Inside Information and Commodity Derivatives under MAR

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On September 30, 2016, the European Securities Markets Authority (“ESMA“) published final guidelines (ESMA/2016/1412) on information relating to commodity derivatives disclosable under the Market Abuse Regulation (Regulation 596/2014) (“MAR“).

Article 7(5) of MAR requires ESMA to issue guidelines to establish a non-exhaustive list of information that is reasonably expected or required to be disclosed in accordance with legal or regulatory provisions in EU or national law, market rules, contract, practice or custom, on the relevant commodity markets or spot markets.

ESMA expects market participants, investors and regulators to take the list of examples provided in the guidelines into account when assessing whether information is “inside” information. It should be noted that other conditions of the definition not covered by the new guidelines should also be taken into account.

ESMA also explains that the guidelines do not create any further information disclosure requirements, as the concept of “required to be disclosed” refers to existing or future disclosure requirements (such as, under national law), independent of the guidelines.

National competent authorities (“NCAs“) have two months from the issuance of the different language versions of the guidelines to confirm whether or not they intend to comply with them. If a NCA does not comply or does not intend to comply, it will have to inform ESMA, stating its reasons.

ESMA consulted on the guidelines in March 2016 (ESMA/2016/444).

Delegated Regulation under MAR Covering Indicators of Market Manipulation, Disclosure Thresholds, Trading During Closed Periods and Notifiable Managers’ Transactions

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The European Commission’s Delegated Regulation supplementing the Market Abuse Regulation (Regulation 596/2014) (MAR) as regards an exemption for certain third countries’ public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers’ transactions, was published in the Official Journal of the EU on 5 April 2016.

The Delegated Regulation specifies:

  • The public bodies and central banks of third countries benefitting from the exemption under Article 6(1) of MAR.
  • The indicators of market manipulation set out in Annex I of MAR.
  • The minimum thresholds for the exemption of certain participants in the emission allowance market from the requirement to publicly disclose inside information.
  • The competent authority that should be notified concerning delays in the public disclosure of inside information.
  • The circumstances under which trading in a closed period may be permitted by an issuer.
  • The types of transactions that would trigger the notification requirement under Article 19 of MAR.

The Delegated Regulation enters into force on April 24, 2016 and will apply from July 3, 2016.

ESMA Consults on Guidelines on Disclosure of Information on Commodity Derivatives Markets or Related Spot Markets under MAR

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On March 30, the European Securities and Markets Authority (“ESMA”) opened a public consultation on draft guidelines under the Market Abuse Regulation (“MAR”).

ESMA is consulting on its proposed non-exhaustive indicative list of information expected or required to be published on commodity derivatives markets or spot markets for the purposes of determining inside information regarding commodity derivatives and of triggering the prohibitions for insider dealing.

Under MAR, inside information in relation to commodity derivatives must relate to either the commodity derivatives themselves or to the related spot commodity contract. However there is a wide variety of commodities markets and commodity derivatives markets which may require distinguishing between types of information specific to these markets. ESMA is giving further consideration to the scope of the instruments or products concerned.

ESMA will consider all comments received by May 20. Consultation Paper.

European Commission Adopts Delegated Regulation on Presentation of Investment Recommendations and Disclosure of Conflict of Interest Under MAR

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The European Commission has adopted a Delegated Regulation supplementing the Market Abuse Regulation (“MAR“) with regard to regulatory technical standards for the technical arrangements for the objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflict of interest (under Article 20).

The Delegated Regulation provides for rules on the identity of producers of recommendation; introduces a general standard on objective presentation of recommendations, applicable to any person mentioned in Article 20(1); sets out requirements on the maintenance of records of all recommendations produced on any issuer or financial instrument and disseminated during the preceding 12-month period and determines the general standards and additional obligations relating to disclosure of interests or of conflicts of interest. It also ensures that recommendations include the date and time on which the recommendation was first disseminated and provides for specific arrangements for dissemination of recommendations, their summary or extract and when recommendations are substantially altered.

Once approved by the Council of the EU and the European Parliament, it is expected that the Delegated Regulation will apply from July 3, 2016. The Delegated Regulation can be found here.

Delegated Regulation Adopted Under Market Abuse Regulation

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On February 26, the European Commission adopted a Delegated Regulation supplementing the Market Abuse Regulation (No. 596/2014) (“MAR“) laying down regulatory technical standards on accepted market practice.

MAR defines “accepted market practice” as a specific market practice that is accepted by a competent authority of a member state (Article 3(1) MAR). ESMA is required to develop draft regulatory technical standards specifying the criteria, procedure and requirements for establishing an accepted market practice and the requirements for maintaining or terminating it or modifying the conditions for its acceptance. The Delegated Regulation provides for a list of “supervised persons” for the purposes of the Delegated Regulation, and lays down requirements for establishing an accepted market practice.

The Council of the EU and European Parliament are expected to review and consider the Delegated Regulation. Provided there are no objections the Delegated Regulation will apply from July 2, 2016.

ECON Publishes Reports Postponing Application of MiFID II, MiFIR, MAR and CSDR

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The European Parliament’s Committee on Economic and Monetary Affairs (“ECON“) has published two draft reports on the proposed directive postponing application of the MiFID II Directive, the proposed regulation amending the Markets in Financial Instruments Regulation (“MiFIR“), the Market Abuse Regulation (“MAR“) and the Regulation on improving securities settlement and regulating central securities depositories (“CSDR“) as regards certain dates.

Both reports contain an explanatory statement, which expresses disappointment that, due to the failure of ESMA and the Commission to deliver regulatory technical standards and delegated acts by the deadline set out in the legislation, and to launch the necessary procurement procedures in time, MiFID II will not be applicable as initially scheduled on January 3, 2017. The rapporteur acknowledged that the delay of the application by a year to January 2018 was sensible and justified, given the scale of the tasks yet to be completed before implementation.

The reports can be found here and here.

Commission Extends by One Year the Application Date for the MiFID II Package

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On February 10, the European Commission published a press release announcing it is proposing a one year extension to the application date of the MiFID II legislative package (that is, the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR).

To implement its proposal, the Commission has published:

  • A legislative proposal for a Directive amending the MiFID II Directive as regards certain dates.
  • A legislative proposal for a Regulation amending MiFIR, the Market Abuse Regulation (Regulation 596/2014) (MAR) and the Regulation on improving securities settlement and regulating central securities depositories (CSDs) (Regulation 909/2014) (CSDR) as regards certain dates.

Member states must transpose the MiFID II Directive by July 3, 2016. Both the MiFID II Directive and MiFIR are scheduled to apply from January 3, 2017. Under the Commission’s proposal, national competent authorities (NCAs) and market participants will have an additional year to comply with MiFID II. The proposed new application date is January 3, 2018.

The Commission is proposing the application date extension as a result of the complex technical data infrastructure that needs to be established so that MiFID II can operate effectively. As a result of significant challenges in collecting the data that is needed, ESMA informed the Commission in October 2015 that neither NCAs nor market participants will have the necessary systems ready by January 3, 2017. As a result, ESMA has concluded that a delay is unavoidable.

In the light of these exceptional circumstances, and to avoid legal uncertainty and potential market disruption, the Commission considers an extension of the MiFID II application date is necessary.