7. Market Abuse 8. MiFID

Question 1

7.1 What is considered market abuse for the purposes of UK MAR? (3)

Answer 1

• insider dealing
• unlawful disclosure of inside info
• market manipulation

Unlawful behaviour of this kind ‘prevents full and proper market transparency’ and adversely impacts on trading in integrated financial markets

These are all considered on the basis of what a reasonable investor of the market would consider appropriate

Question 2

7.1 What is a prescribed market?

Answer 2

Markets which are operated by an RIE i.e. LSE Main Market, AIM and the Aquis Exchange Growth Market

Qualifying investments are those investments that are traded on prescribed markets, or where application has been made for trading on those markets

Question 3

7.1. What do the prohibitions of insider dealing, unlawful disclosure of inside info, and market manipulation apply to? (4)

Answer 3

a. Financial instruments admitted to trading on a regulated market, or for which a request for admission to trading on a regulated market has been made
b. Financial instruments traded on an MTF, admitted to trading on an MTF, or for which a request for admission to trading on an MTF has been made. This includes exchange-regulated markets such as AIM and the Aquis Exchange Growth Market
c. Financial instruments traded on an OTF, albeit that OTFs were introduced when MiFID II came into force in Jan 2018
d. Financial instruments not covered by points (a), (b) or (c), the price or value of which depends, on or has an effect on, the price or value of a financial instrument referred to in those points including, but not limited to, CDSs and CFDs

Question 4

7.1 Which key requirements did the UK MAR introduce? (12)

Answer 4

• inside information and disclosure
• Insider dealing and unlawful disclosure
• Market manipulation
• Market soundings
• Buy-back programmes and stabilisation measures
• Accepted market practices (AMPs)
• Insider lists
• Suspicious transactions and order reports
• Directors’/managers’ transactions
• Investment recommendations
• Whistleblowing
• Regulators’ powers

Question 5

7.1 What did the UK MAR change regarding inside info an disclosure regulation?

Answer 5

definition of inside info widened to capture spot commodity contracts
Extends scope: (to issuers of securities admitted to trading only on an MTF or OTF, some Emission Allowances Market Participants (EAMPs)) to provide public disclosure of inside info
Issuers and EAMPs must notify the regulator when delaying public information disclosure, and FIs must seek consent from the regulator prior to delaying disclosure due to financial stability concerns

Question 6

7.1 What did the UK MAR change regarding Insider dealing and unlawful disclosure?

Answer 6

the use of inside info to amend or cancel an order shall be considered to be insider dealing. It is also clarified that recommending or inducing another person to transact on the basis of inside info amounts to the unlawful disclosure of inside info

Question 7

extension

7.1 What did the UK MAR change regarding market manipulation? (2)

Answer 7

Offence has been extended to capture attempted manipulation
Benchmarks, and in some situations, spot commodities, are now in the scope of the manipulation offence
Examples set out e.g. acting in collaboration to secure a dominant position over the supply or demand of a financial instrument, and certain algorithmic trading strats which disrupt the functioning of a trading venue

Question 8

7.1 How long does an issuer have to publicise relevant transactions of their directors/managers once it has been provided to them?

Answer 8

3 business days

Question 9

7.1 What does UK MAR define as a Persons Discharging Managerial Responsibilities (PDMRs)?

Answer 9

either of the following:
- a member of the admin, management or supervisory body of that entity (that is, a director)
- a senior exec who is not a member of the bodies referred to above but who has regular access to inside info relating directly or indirectly to that entity and has the power to make managerial decisions affecting the future developments and business prospects of that entity

Question 10

7.1 What are the regulators’ powers according to UK MAR?

Answer 10

Fines of up to 5 million EUR for individuals
15% of firms’ annual turnover

Question 11

7.2 What are the 5 types of market abuse found in MAR1?

Answer 11

1. Insider dealing
2. Unlawful disclosure
3. Manipulating transactions
4. Manipulating devices
5. Dissemination

2 forms were removed but their contents integrated into the other 5 types: Misuse of information and misleading behaviour and distortion

Question 12

7.2 According to MAR1, when does an insider have inside info for market abuse purposes? (5)

Answer 12

1. As a result of their membership in the admin, management or supervisory bodies of the issuer of the investment
2. as a result of their holding in the capital of the issuer of the investment
3. as a result of having access to the info through their employment, profession or duties
4. as a result of criminal activities
5. which they have obtained by other means and which they know, or could reasonably be expected to know, is inside info

Question 13

7.3 Who is involved in market abuse cases?

Answer 13

It is a civil, not criminal, offence, therefore imprisonment is not possible
Cases are investigated by the FCA and heard by the Regulatory Decisions Committee (RDC)

Question 14

7.3 Which sanctions are the FCA allowed to impose for Market Abuse? (6)

Answer 14

• Withdrawal of approval or authorisation
• Imposing an unlimited civil penalty
• Making a public statement that a person has engaged in market abuse
• Applying to the court for an injunction to restrain threatened or continued market abuse, an injunction requiring a person to take steps to remedy market abuse, or a freezing order
• Applying to the court for a restitution order
• Requiring the payment of compensation to victims of the abuse

The FCA cannot impose penalties if there are reasonable grounds for it to believe that the person believed that the behaviour in question did not amount to market abuse, or that the person had taken all reasonable precautions and exercised all DD to avoid engaging in market abuse

Question 15

7.4 What is the maximum penalty for breaching the UK insider dealing and misleading statement and impressions legislation?

Answer 15

10 years in jail
payment made up of two elements:
- disgorgement of the benefit received as a result of the breach
- a financial penalty reflecting the seriousness of the breach

Question 16

7.4 Which factors does the DEPP 6.2.1 guide the FCA to take into account in considering the breach of UK insider dealing and misleading statement and impressions legislation? (5)

Answer 16

• the nature and seriousness and impact of the ‘suspected’ breach
• the conduct of the person after the breach
• the previous disciplinary record and compliance history of the person
• the degree of sophistication of the users of the market in question, the size of the market and the susceptibility of the market to abuse
• the impact, having regard to the nature of the behaviour, that any financial penalty or public censure may have on the financial markets or the interest of consumers

Question 17

7.4 What is the FCA’s penalty-setting regime based on (DEPP 6.5)? (3)

Answer 17

1. Disgorgement - a firm or individual should not benefit from any breach
2. Discipline - a firm or individual should be penalised for wrongdoing
3. Deterrence - any penalty imposed should deter the firm or individual who committed the breach, and other, from committing further or similar breaches

Question 18

7.4 What is the five-step framework for incorporating financial penalties of UK insider dealing and misleading statement and impressions legislation?

Answer 18

1. Removal of any financial benefit derived directly from the breach
2. The determination of a figure which reflects the seriousness of the breach
   
   • the FCA will decide on the percentage of the income which will form the basis of the penalty - between 0% and 40%
   • these levels will apply for penalties imposed on firms and individuals in non-market abuse cases
     
     • Level 1 - 0% (profit multiple of 0)
     • Level 2 - 10% (profit multiple of 1)
     • Level 3 - 20% (profit multiple of 2)
     • Level 4 - 30% (profit multiple of 3)
     • Level 5 - 40% (profit multiple of 4)
   • in respect of penalties imposed on individuals in market abuse cases, where the market abuse was referable to the individual’s employment
   • where the case was not referable to the individual’s employment:
     
     • the figure for step 2 will be a multiple of the profit or loss avoided
     • where the seriousness level is determined to be level 4 or 5, it will be £100,000
3. An adjustment made to the step 2 figure to take account of any aggravating and mitigating circumstances
4. An upward adjustment made to the amount arrived at after steps 2 and 3, where appropriate, to ensure that the penalty has an appropriate deterrent effect
5. If applicable, a settlement discount will be applied. This discount does not apply to disgorgement of any financial benefit derived directly from the breach

Question 19

7.4 What does the DEPP sourcebook say the factors the FCA will take into account for market abuse are?

Answer 19

DEPP 6.2 - Deciding whether to take action
DEPP 6.3 - Penalties for market abuse
DEPP 6.4 - Financial Penalty for public censure
DEPP 6.5 - Determining the appropriate level of financial penalty
- 6.5A - the 5 steps for penalties imposed on firms
- 6.5B - the 5 steps for penalties imposed on individuals in non-market abuse cases
- 6.5C - the 5 steps for penalties imposed on individuals in market abuse cases

Question 20

7.5 What are the differences in Market Abuse legislation for Sections 89-95 of Part 7 of the FSA 2012 and the CJA vs the FSMA market abuse regime?

Answer 20

FSA 2012 and CJA provide for a criminal regime, whereas FSMA is civil
This means FSMA requires a lower standard of proof
CJA applies to a shorter range of investments, FSMA/MAR includes other markets such as commodities and energy

Question 21

7.5 Is it in FCA policy to impose sanctions for market abuse if a person is being prosecuted for insider dealing or misleading statements and impressions?

Answer 21

No

Question 22

7.7 What is the big difference in reporting market abuse between the previous regime (MAD) and the UK MAR?

Answer 22

It no longer just applies to executed trades. It also applies to unexecuted orders and requests for quotes (RFQs)

Question 23

7.7 What are the reporting requirements for Market operators and investment firms that operate a trading venue under UK MAR?

Answer 23

Establish and maintain effective arrangements, systems and procedures aimed at preventing and detecting insider dealing, market manipulation and attempts of these
Report order and txns, including any cancellation or modification, that could constitute insider dealing, market manipulation or attempts of these to the relevant authority of the trading venue without delay

Question 24

7.7 What are the reporting requirements for firms arranging or executing transactions under UK MAR?

Answer 24

Establish and maintain effective arrangements, systems and procedures to detect and report suspicious orders and txns
Must be proportionate to the scale and complexity of the business activity undertaken by the firm
Report order and txns, including any cancellation or modification, that could constitute insider dealing, market manipulation or attempts of these to the relevant authority of the trading venue without delay

Question 25

7.7 What are the requirements for ‘arrangement, systems and procedures to detect and report suspicious orders and transactions’?

Answer 25

They should:
- be appropriate and proportionate
- be regularly assessed, at least through an annually conducted audit and internal review, and updated when necessary
- be clearly documented in writing, including any changes or updates to them, and the documented info should be maintained for a period of 5 years
- allow for the analysis, individually and comparatively of each and every txn executed and order placed, modified, cancelled or rejected in the systems of the trading venue as well as txns executed outside a trading venue
- produce alerts indicating activities requiring further analysis for the purposes of detecting potential insider dealing or market manipulation or attempted insider dealing or market manipulation, and cover the full range of trading activities undertaken

Firms should:
- put in place and maintain arrangements and procedures that ensure an appropriate level of human analysis in the monitoring, detection and identification of txns tat could constitute insider dealing, market manipulation, or attempts of these
- upon request, provide the competent authority with the info to demonstrate the appropriateness and proportionality of their systems in relation to the scale, size and nature of their business activity, including info on the level of automation put in place in such systems
- provide effective and comprehensive training to the staff involved in the monitoring, detection and identification of orders and txns that could constitute insider dealing, market manipulation or attempts of these. Training should be regular and appropriate to the business

Question 26

7.7 What is the layout of a Suspicious Transaction and Order Report (STOR)?

Answer 26

Includes the following:
- ID of the person submitting the STOR; the capacity in which the person submitting the STOR operates, in particular when dealing on own account or executing orders on behalf of third parties
- Desc. of the order or txn:
- the type of order and the type of trading, in particular block trades and where the activity occurred
- price and volume
- Reasons for which the order or txn is suspected to constitute insider dealing, market manipulation or an attempt of these
- Means of identifying any person involved in the order or txn that could constitute insider dealing, market manipulation or attempt of these, including the person who placed or executed the order and the person whose behalf the order has been placed or executed
- Any other information and supporting docs which may be deemed relevant for the competent authority for the purposes of detecting, investigating and enforcing insider dealing or market manipulation

Question 27

8.1 What is the purpose of the Markets in Financial Instruments Directive (MiFID)?

Answer 27

If a firm was authed in one EU member state to provide investment services, this single auth enabled the firm to provide those investment services in other member states without requiring any further auth
Known as the passport

Question 28

8.1 When did MiFID come into effect in the UK?

And when was it replaced by MiFID II and MiFIR?

Answer 28

MiFID came into effect in 2007

Replaced on 3 January 2018

Question 29

8.1 Which areas were most affected by MiFID II?

Answer 29

Retail fund management, investment research and securities trading aspects of the financial sector

Question 30

8.1 Which changes were made by the HMT and FCA to MiFID and MiFIR following Brexit?

Answer 30

• directly applicable EU legislative Acts (level 1, level 2, delegated regulations)
• technical standards (brought in via EUWA and amended by regulators’ exit instruments under Technical Standards Regulations)
• EU non-legislative material (guidelines, recommendations, opinions and Q&As - much of which will remain relevant and applicable)
• UK Legislation (Acts of Parliament and statutory instruments)
• Regulators’ rules (FCA, PRA and the BoE made rules that reflected EU law)
• regulators’ non-rulebook guidance (FCA/PRA guidance relating to EU law)
• a TPR for EEA firms in the UK and equivalence decision-making by HMT

Question 31

8.2 Which 3 criteria do investment firms and credit institutions have to fulfil for UK MiFIR to apply to them?

Also applies to market operators with a head office in the UK, and any UK trading venue, together with CCP clearing houses, and those with proprietary benchmarks

Answer 31

• head office in the UK
• they have permission under part 4A of FSMA to carry on regulated activities relating to investment services and activities in the UK
• they would require authorisation under the MiFID II Directive (2014/65/RU) and the CRD IV Directive (2013/36/EU) if they had their head office in an EEA state

Question 32

8.2.2 What is a MiFID firm?

Answer 32

One whose regular occupation or business is the provision to others of one or more MiFID services or activities, on a professional basis, where the performance of one or more of these services or activities relates to MiFID financial instruments

Question 33

8.2.2 What is a non-MiFID firm?

Answer 33

Sometimes referred to as ‘out-of-scope’ firms, or as carrying on out-of-scope business.
Include insurance undertakings, employee schemes, people administering their own assets, and any firms which do not provide investment services and/or perform investment activities