Tue. Sep 17th, 2019

Planet Compliance

Innovation & Regulation in Finance

Market Abuse training

Market Abuse Training

The following information is intended to provide a basis for a training course or presentation on Market Abuse. It should not by all means considered complete, in particular since requirements differ from jurisdiction to jurisdiction and the needs of a particular firm or organisational environment may vary.

The information is based on the regulatory requirements in the UK as of early 2016 and future regulatory developments need to be monitored closely, in particular with a view to the upcoming revised EU Market Abuse legislation, i.e. Market Abuse Directive II and Market Abuse Regulation. For more on the topic, please see our dedicated area “Everything about Market Abuse” that contains the latest news and in-depth analysis.

As for the format and how the sections and the content presented here can be used, it is down to everyone itself to decide whether it should be done in an online training, traditionally on slides or be read out in to the participants in a dark room (just to give you an idea how to present in a different way). Similarly, it is down to the user how much weight he or she wants to put on the different, include or exclude sections and information; the following is simply a proposal we thought might be helpful.

 

Introduction

As with any presentation, it’s probably a good idea to start with an introduction that defines

  • its purpose, i.e. the importance of the market abuse the regime to protect the financial system, to ensure they are equal and fair, support investor confidence by being fair and not corrupt and to maintain the markets’ integrity;
  • its scope, that means what can the participant expect in respect of its structure and what does it cover and what not, for example, UK and EU legislation, but not US etc.; and
  • the objectives, i.e. once the training is completed, the participants will have a better understanding of what constitutes market abuse, the potential criminal consequences of committing market abuse, the respective behaviours, as well as being able to identify suspicious transactions and understand personal responsibilities with regard to reporting obligations.

 

The legal background

This section should present the legal sources for the Market Abuse Regime, for example in the EU the Market Abuse Directive, which however will be replaced by MAD II and MAR. It should be mentioned that the UK framework goes beyond the EU requirements and is stricter as it extends it to seven punishable offences.

With regard to the legal basis in the UK, national legislation such as the Companies Act 1980 and the Criminal Justice Act 1993 should be considered as they establish insider dealing as a criminal offence as opposed to the civil offences constituted by the implementation of the Market Abuse Directive and the FSMA.

The seven offences can be classified either as Abuse of Information or Market Manipulation and are:

  1. Insider Dealing
  2. Improper Disclosure
  3. Misuse of Information
  4. Manipulating transactions
  5. Manipulating devices
  6. Dissemination
  7. Misleading behaviour and distortion

The first three come under Abuse of Information, while the latter four are forms of Market Manipulation.

A quick word, about the third offence though: Misuse of Information was like the seventh offence a so-called super equivalent, i.e. it derived from the UK market abuse regime that existed before the implementation of the EU Market Abuse Directive and were given an extended lifespan, which was then extended until in December 2014 the FSMA 2000 (Market Abuse) Regulations 2014 came into force. Whilst the other super equivalent has been given an extension, the legislator chose to let section 118 (4) expire. We think it’s still worth talking about it because a) it helps to fully understand the market abuse regime knowing its evolution. As for b), the reason it was not extended was based on the development that it more recent case law the threshold of what exactly constitutes inside information under the first two market abuse offences was lowered significantly, so that the sweep up clause of misuse of information became less relevant. Thus, it is technically not in force anymore, but the behaviour is still covered by the current regulation and therefore still very relevant.

As for its scope, it should be said that the Market Abuse Regime applies to all individuals and firms as well as all financial instruments traded on a regulated market and related instruments such as derivatives.

 

The offences in detail

The next section should focus in detail on the different offences, for example what exactly constitutes insider dealing. Define the act, i.e. insider dealing as the abuse of inside information, which in turn is information about a financial instrument that is non-public and price sensitive. Point out that it isn’t limited to deal or attempting to deal on that information, it also includes encouraging others to deal based on the inside information for example selective briefing at ours by directors or managers of issuers. Another level of detail would be to provide how it can be determined what is inside information, for example: is it precise information that is not generally available, related to one or more issuers or investment and that a reasonable investor would use to help them make investment decisions? If generally available would it be likely to significantly affect the price of an investment?

In order to may the abstract requirements easier to understand and to memorise, use specific examples for the respective offence, for example the FSA fine for Greenlight Capital and its owner David Einhorn or the conviction of Galleon hedge fund founder-owner Raj Rajaratnam and the former McKinsey MD and Goldman Sachs board member Rajat Gupta in the USA. A good example for Fixed Income markets is the case of former Credit Suisse trader Mark Stevenson in the manipulative trading in UK government gilts.

With regard to inside information it is also important to highlight the Spector decision of the European Court of Justice, which reversed the burden of proof: As such the regulator only has to prove that a defendant held inside information on a company at the time of dealing or attempting to deal in that company’s securities, while the defendant has the difficult task to prove that he or she did not use this information when dealing.

Make sure that you cover all seven offences and also elaborate on the different examples, for example for market manipulation “Pump and Dump, i.e. the artificial price inflation of a stock one owns through false and misleading and positive statements only to sell the cheaply purchased stock at a higher price, or “Trash and Cash, i.e. spreading negative information about a company stock one has just sold in order to push the stock price down and to buy it subsequently back at a lower price, to name two. For more information on the offences and other Market Abuse related topics see also our dedicated area “Everything about Market Abuse”.

 

Rumours

A topic that has become more prominent in the last couple of years and is as such regularly included in Market Abuse presentations is the aspect of rumours. A prominent example of the financial crisis of 2008 was fall of the share price of HBOS, a British bank, where false rumours were spread that HBOS had funding difficulties. This led to a significant drop in the share price, which according to market commentators was exploited by traders who initially had spread the rumours to make a profit.

It is important to present the general prohibitions around rumours (not creating, not using for the purpose of market manipulation, and not circulating a rumour if known to be based on inside information, based on false information etc.) and under which conditions and in which way a rumour (if it is not prohibited by the restrictions) a rumour may be communicated.

 

Reporting obligations of Suspicious Transactions

The market abuse regime imposes an obligation to report suspicious transactions. It is therefore important that the participants understand that if they have reasonable grounds to suspect that an employee, client, or another market participant is engaged in market abuse, they have a personal responsibility to promptly report their suspicions to the responsible business unit, i.e. Compliance, which in turn will then investigate and, if necessary, submit the report to the authorities. The participants will also need to know that if they are suspicious of transaction they need to be discreet and only discuss the issue on a strictly need-to-know basis. Under no circumstances should they inform the party who is the subject of the suspicion or any person related to that party.

 

Safeguarding Sensitive Information

Another important aspect in respect of the prevention of market abuse is the safeguarding of sensitive information. Material non-public information must only be disclosed on need-to-know basis, which means that it should only be disclosed if there is valid business reason for doing so. Participants should also be trained on precautions that should be taken to safeguard sensitive information, for example, the creation and maintenance of insider lists, information barriers such as Chinese walls, not to discuss sensitive information in public places where they can be overheard, using codenames for transactions, keeping a clear desk etc.

In particular, the functioning of Chinese walls, the maintenance of insider lists, and what to do in case of a leak of sensitive information to the media could be subject of further slides and detailed information to discuss during the presentation depending on the nature and the setup of a firm.

 

MAD II/MAR

As mentioned before, things are going to change with MAD II and MAR from July 2016 on. Therefore, it might be useful to outline what the regulation and the directive (to an extent since the UK opted out, but will have to adapt the existing Market Abuse Regime and consider introduce new rules) will bring, such as:

  • Existing market abuse rules will be broadened to include abuse on the electronic trading platforms that have proliferated in recent years.
  • Abusive strategies enacted through high frequency trading will be clearly prohibited.
  • Manipulation of benchmarks such as LIBOR will be punishable as market abuse and result in significant fines.
  • Market abuse occurring across both commodity and related derivative markets will be prohibited, and cooperation between financial and commodity regulators will be reinforced.
  • The deterrent effect of the legislation will be far greater than today, with the possibility of fines of at least up to three times the profit made from market abuse, or at least 15% of turnover for companies. Member-States could decide to go beyond this minimum.
  • Common EU definitions of market abuse offences such as insider dealing, unlawful disclosure of information and market manipulation.
  • A common set of criminal sanctions including fines and imprisonment of four years for insider dealing/market manipulation and two years for unlawful disclosure of inside information.
  • Legal persons will be held liable for market abuses.
  • The definition of market manipulation has been extended to include many types of behaviour.

For more information on the specific situation in the UK see also the FCA website on MAR (http://www.fca.org.uk/firms/markets/market-abuse/mar) and follow the updates on our dedicated area “Everything about Market Abuse”.

 

Conclusion

The sections outlined above are by no means conclusive and any Market Abuse training needs to be tailored to the specific needs of a firm based on its activities and geographic exposure. We hope they are helpful though and provide some useful guidance.

Market abuse is one of the key Compliance topics in financial services and it is of the highest importance that the employees of the firm understand the rules and the potential consequences for both the company and the individual in case of a breach. However, it is also important to remember to not only get the regulatory framework across but to create an environment of good collaboration, so that compliance is contacted whenever guidance is required or a matter needs to be escalated.

If you have any questions, comments or suggestions, please do get in touch with us!

 

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