The Market Abuse Regulation (596/2014/EU) (MAR) came into force on July 3rd 2016, and reversed the previous Market Abuse Directive (2003/6/EC) (MAD), replacing it with an extended scope and expanded civil market abuse regime across the EU. It aims to increase market integrity and investor protection, while enhancing the attractiveness of securities markets for capital raising.
The following categories of behaviour are defined as a market abuse in Market Abuse Regulation:
Market Abuse applies to financial instruments:
It is a civil offence to breach the MAR, which can be imposed by unlimited fines in the EU. In the UK, criminal sanctions for insider dealing and market manipulation can incur custodial sentences of up to 7 years and unlimited fines.
This type of behaviour occurs where an insider deals, attempts to deal or refrains from dealing based on inside information relating to the investment in question.
Inside information is:
Information that is considered precise, is information that indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur and where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument in question.
Information would be likely to have a significant effect on price if it is information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions.
Behaviour typical of insider dealing includes:
Person may typically come into possession of inside information through the following (non-exhaustive) variety of ways:
Working in the financial sector can be quite challenging. A lot of professionals have access to the inside information and very often they use this information to make a profit. After the 2008 crisis, the regulators around the world put a lot of effort into monitoring and detecting insiders. Currently there are a lot of automated systems to monitor emails and telephones conversations, and any suspicious transactions that may arise on the market. The regulated companies are required to provide adequate systems and controls to prevent insider dealing and report any suspicions to the local authorities.
Unlawful disclosure refers to the act of revealing inside information to a third party without following the proper processes and procedures for dissemination of such information, except where the disclosure is made in the normal exercise of an employment, a profession or duties. To prevent unlawful disclosure, MAR mandates the use of insider lists which help track who has (had) access to inside information at a specific moment in time.
Professionals are prohibited from making unlawful disclosures and must obtain prior approval from the Head of Compliance or Money Laundering Reporting Officer before making any disclosures of inside information.
This information can be related to acquisitions, financial results, new Board or CEO appointments, or any information that can have a significant price on a company's share price.
Market manipulation refers to artificial inflation or deflation of the price of a security. It is also known as price manipulation or stock manipulation, which involves the literal manipulation of a financial market for personal gain. It means influencing the behaviour of the securities with the intent to do so.
Market manipulation is comprised of four broad activities:
A manipulating transaction is one where a person enters into a transaction, places an order to trade, or conducts any other behaviour which:
Examples of manipulating transactions include those being undertaken to give false and misleading impressions:
A manipulating device occurs in those situations where a person enters into a transaction, places an order to trade or any other activity or behaviour which affects or is likely to affect the price of one or several financial instruments and which employs a fictitious device or any other form of deception or artificiality.
The dissemination of manipulative information offence occurs where information disseminated through the media, including the internet or other means, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of any financial instrument, or is likely to secure, the price of such financial instruments at an abnormal or artificial level. This offence also includes the dissemination of rumours, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading (further information on rumours is detailed on pg 9).
Lastly, the offence of engaging in any other misleading behaviour or distortion takes place where a person transmits false or misleading information or provides false or misleading inputs in relation to a benchmark, where they knew or ought to have known that it was false or misleading, or any other type of behaviour that manipulates the calculation of a benchmark.
 REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014
The author of the lesson: Tetyana Golovata, Compliance Officer at Schroders (Cazenove Capital), United Kingdom