The revised Market Abuse Directive and new Market Abuse Regulation

To what extent will the revised framework impact banks?

Banking alert | 19 April 2016 | The revised Market Abuse Directive and new Market Abuse Regulation

The revised market abuse framework, which seeks to improve investor confidence in the markets, will demand enhancements in banks’ systems, controls and procedures.

Introduction to the new framework

The revised Market Abuse Directive (MAD) and new Market Abuse Regulation (MAR), which come into force on 3 July 2016, seek to protect investors by regulating insider dealing, unlawful disclosure of inside information and market manipulation. The general objective of improving investor confidence in the markets links MAD/MAR to MiFID II and MiFIR.

MAR contains the detailed provisions and administrative sanctions, while MAD deals with the criminal sanctions of market abuse. The revision of the framework by legislating both a revised directive and new regulation is part of the European Commission’s approach to enhance harmonisation.

Notable developments

  • Scope. MAR/MAD apply to financial instruments admitted to trading on a MiFID II trading venue, or for which a request for admission to trading has been made. Trading venues include Regulated Markets, Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs). Credit institutions that are issuers of financial instruments admitted to trading on a Regulated Market are subject to the regime established under MAD/MAR.
  • Market soundings. These comprise the communication of information, prior to the announcement of a transaction, in order to guage investor appetite and likelihood of take-up. Up to this point, market soundings were unregulated. Now, the new framework provides for certain steps to be taken prior to conducing a market sounding and by imposing detailed record-keeping requirements.
  • Reporting suspicious transactions and orders. One of the key changes of the regulation is the requirement to make suspicious order reports, in addition to making suspicious transaction reports
  • Insider lists. Issuers are required to draw up a list of all persons who have access to inside information, to promptly update the list and provide the list to the competent authority upon request.
  • Directors’ transactions. MAD already requires directors and other ‘persons discharging managerial responsibilities’ within an issuer, and persons connected with them, to report transactions in the issuer’s securities. However, the extension of scope in MAR means that this will in future catch relevant individuals in a wider range of issuers.
  • Sanctions. The sanctions for infringement under MAR are significant and distinguish between natural and legal persons. Infringements may be of three types:
    • Infringements of market abuse;
    • Infringements for not having an effective arrangement, system and procedure to prevent and detect market abuse and public disclosure of inside information;
    • Infringements of insider list, managers’ transactions and investment recommendations and statistics.

Key impacts on banks

We see MAD/MAR as having as impacting in-scope banks in the following areas:

  1. Systems and KYC procedures. Rules for reporting suspicious transactions and orders will require banks to have systems in place that are capable of monitoring trading patterns more effectively as well as enhanced KYC procedures.
  2. Internal audit. The internal audit function of banks will need to ensure that all the enhanced controls/systems brought about by the revised framework are operating effectively.
  3. Operational risk in the context of ICAAP. The more stringent sanctions for infringements under the new framework, in particular for having weak systems in place, may mean that banks are more susceptible to conduct and reputational risk. This may mean the requirement for higher Pillar II capital charges.
  4. Disclosure of SREP scores. The European Securities and Markets Authority (ESMA) published a Q&A on the common operation of the MAD, in which it questioned the disclosure of inside information related to Pillar II requirements. In the context of SREP, whenever a credit institution subject to the market abuse regime is made aware of information, notably the results of the exercise, it is expected to evaluate whether that information meets the criteria of inside information. If these critera are met, the credit institution would have to publicly disclose the inside information. Disclosure of inside information is a matter of national supervision and enforcement of MAD, solely under the competence of the national competent authority. The question remains as to whether the MFSA will require banks to disclose their SREP scores.  

How can we help?

Our locally based team of banking experts has the skills, credentials and experience to prepare you for compliance with MAD/MAR. Our service offerings include the following:

  • Enhancement of systems and KYC procedures. Our consulting practice will work with you to re-design your trade monitoring system to ensure any suspicious transactions and orders are captured.
  • Internal audit services. We have experience in acting as the internal audit function to appropriately assess the operational effectiveness of internal controls, systems and procedures.
  • SREP transformation. Our holistic SREP approach ensures that your business model and strategy are viable and sustainable, and closely interlinked to the ICAAP and ILAAP. We have extensive experience in reviewing ICAAP and assessing Pillar II capital adequacy for conduct and reputational risk.
  • Holistic regulatory change project management. Apart from assisting you in achieving compliance with the requirements of MAD/MAR, we can help you understand the overlaps with other regulations to reduce overall compliance spend, including MiFID II, MiFIR and EMIR.
  • Directors training. Our tailored training solutions ensure that board members are up to date with the latest risk and regulatory developments in the context of MAD/MAR.
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