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LEVEL 6 Regulation and Compliance > UK MARKET ABUSE REGULATION (MAR) > Flashcards

UK MARKET ABUSE REGULATION (MAR) Flashcards

1
Q

What was the impact of Brexit on EU legislation with MAR?

A

Following the end of the transitional period, the UK onshored relevant EU legislation under the EUROPEAN UNION in 2018

‘MAR’ in the UK is now called ‘UK MAR’

as noted by the FCA in ‘Onshoring and the Temporary Transitional Power’ - EU firms operating in the UK were permitted to continue to comply with the relevant EU legislation

AFTER 31 MARCH 2022 UK firms have to comply with MAR

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2
Q

What is the scope of MAR?

A

It applies to
- financial instruments admitted on a UK or EEA regulated market, for which a request has been made
- financial instruments traded on an MTF, admitted to trading on an MTF
- financial instruments traded on an OTF
- financial instruments not covered by the regulated market/MTF/OTF but whose value depends on or has an effect on the price/value of a financial instrument such as a credit default swap

OTFs came in with MiFID II
It applies to OTC transactions where the underlying financial instrument could impact the price of a financial instrument

Operators of Regulated Markets, MTFs or OTFs now have an obligation to notify the FCA for financial instruments for which a request for admission to trading on their venue is made

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3
Q

What is the definition of a financial instrument?

A

A financial instrument is an asset or evidence of the ownership of an asset, or a contractual agreement between two parties to receive or deliver another financial instrument

transferable securities
money market instruments
units in collective investment undertakings
options, future, swaps, forward rate agreements

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4
Q

What is market manipulation known as?

A

Entering into a transaction or placing an order to carry out an execution or any other behaviour which

  • gives or is likely to give false or a misleading signal as to the supply or demand of a financial instrument
  • secures or likely to secure the price of a financial instrument or related spot commodity contract at an artificial level unless the person entering in the transaction establishes it has been carried out for legitimate reasons

Entering into a transaction which affects the price of one or more financial instruments or related spot commodity contract which employs a form of deception

Disseminating information through the media which includes rumours where the person who makes the dissemination knew or ought to have known that the information was false

Transmitting false or misleading information or providing false or misleading inputs in relation to a benchmark where the person who made the transmission or provided the input knew or ought to have known that it was false or misleading

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5
Q

What behaviours constitute market manipulation?

A
  • a person or persons acting in collaboration to secure a dominant position over the supply of or demand for a financial instrument
  • buying or selling of financial instruments at the opening or closing of a market
  • Placing of orders to a trading venue including cancellation and modification by any means of trading which
    • makes it more difficult for other persons to identify genuine orders
    • creates a false signal about the supply/demand of/for a financial
      instrument
    - taking advantage of occasional or regular access to electronic 
  media by voicing an opinion about a financial instrument
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6
Q

Whats the biggest difference between MAD and MAR?

A

It no longer applies to executed trades - it can also apply to unexecuted orders and requests for quotes

Market operators and investment firms that operate a trading venue are required to establish and maintain effective arrangements, systems and procedures aimed at preventing and detecting insider dealing, market manipulation and attempted insider dealing and market manipulation.

firms are now required to report orders and transactions including cancellations or modifications that could lead or contribute to insider dealing

Where firms have a reasonable suspicion that an order or transaction in a financial instrument, whether placed or executed on or outside a trading venue, could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation, then must report this to the FCA without delay.

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7
Q

What requirements around ‘establish and maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions’ should include?

A

Systems and procedures should
- be proportionate in relation to the scale, size and nature of the business activity
- be regularly assessed, at least annually
- be clearly documented in writing, including any changes/updates and must be recorded for five years
- allow for the analysis, individually and comparatively of each and every transaction executed and order placed/modified/cancelled

  • produce alerts indicating activities requiring further analysis for the purposes of detecting potential insider dealing
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8
Q

What requirements should firms have in place for appropriate systems, arrangements and procedures for market abuse?

A
  • procedures that ensure an appropriate level of human analysis in the monitoring detection and identification of transactions and orders that could institute insider dealing, market manipulation or the attempt of the two
  • processes to provide the FCA with information to demonstrate the appropriateness and proportionality of their systems in relation to the size/scale and nature of business activity
  • effective and comprehensive training to staff for the monitoring/detection and identification of orders and transactions
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9
Q

What are SAFE HARBOURS

A

exemptions to the market abuse regulations

They do not apply to transactions/orders/behaviours that are carried on in the pursuit of monetary, exchange rate or public debt management by agencies of the UK

MAR ARTICLE 14 - INSIDER DEALING
MAR ARTICLE 15 - MARKET SOUNDINGS

Do not apply to share buy-back programmes when:
- the full details of the programme as disclosed prior to trading
- trades are reported as part of the buy-back programme to the competent authority
- there are limits on price and volume
- the buy back scheme is created to reduce the capital of the issuer/to meet obligations arising from debt financial instruments/meeting obligations arising from share option programmes

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10
Q

WHAT IS A MARKET SOUNDING?

A

When a firm is hired by an issuer that wishes to raise funds but wishes to identify investor appetite including the potential interest rate it would have to offer.

It can include the disclosure of price sensitive information and non public information. The disclosing firm has to comply with the following obligations:
- obtain the consent of the person receiving the market sounding to receive the inside information
- inform the person receiving the market sounding that they are prohibited from using the information
- maintain a record of all information given
- advise the recipients of the sounding when the information provided ceases to be considered as inside information

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11
Q

What disclosure requirements are needed for investment recommendations?

A

They are ongoing obligations

  1. facts are clearly distinguishable from interpretations
  2. material sources of information are clearly and prominently indicated
  3. all projections, forecasts and price targets are clearly labelled as such
  4. individuals providing recommendations should make this available to regulators
  5. the date and time when the recommendation is completed is clearly indicated
  6. A list of all recommendations on any financial instrument or issuer that were provided during the preceding 12-month period, containing for each recommendation: the date of dissemination, the identity of the natural person(s), the price target and the relevant market price at the time of dissemination, the direction of the recommendation and the validity time period of the price target or of the recommendation.
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12
Q

What is the difference between offences under market abuse, insider dealing and under FSA 2012 misleading statements and practices?

A

The UK’s primary market abuse legislation is the criminal justice act 1993

Under the CJA - insider dealing is a criminal offence

Under MAR - insider dealing is a civil offence

When a director of a company linked to a listed company buys/sells shares in that company - there is a possibility they are committing a criminal act.

it can be known as a ‘victimless crime’ but it does have a disadvantage to shareholders/investors

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13
Q

Define INSIDER DEALING

A

the deliberate exploitation of information by dealing in financial instruments, having obtained this information by virtue of some privileged relationship or process

Set out in PART V of the CJA 1993
It was updated by the INSIDER DEALING ORDER 2023 - came into effect 15 June 2023

a company cannot commit the offence

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14
Q

What three ways of committing insider dealing can a person be found guilty of?

A

SECTION 52 of the CJA 1993 outlines three ways of committing insider dealing
- dealing in the security
- encouraging others to do so
- disclosing inside information to another

to be found guilty, a person must first be an insider who is in possession of insider information and then must commit one of the three offences

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15
Q

How does information become public?

A
  • when it is published in accordance with the rules of a regulated market, MTF or OTF
  • contained with records open to the public
  • can be readily acquired by those likely to deal in securities to which the information relates
  • about securities of an issuer to which it relates
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16
Q

How is someone an insider for information?

A
  • From being the source themselves (a director, employee or shareholder of an issuer of securities)
  • they have access to the information by employment, office or profession. Doesn’t have to be employed - can be the auditor
  • they are provided the information - such as being a spouse/family
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17
Q

Outline Misleading statements

A

The Financial Services Act 2012 introduced three offences relating to the making/carrying on of misleading statements and practices - it replaced Section 3.97 of FSMA

  • making misleading statements (Section 89)
  • creating false or misleading impressions (Section 90)
  • making misleading statements in relation to benchmarks (Section 91)
18
Q

Sections 89/90 of Financial Services Act 2012 include offences similar to those set out in Section 397 of FSMA with a few differences - what are they?

A

There is a distinction between misleading statements (Section 80) and misleading impressions (Section 90)

Section 89 - only refers to a false or misleading statement. The previous offence referred to a ‘promise or forecast’

Section 90 - contains an additional offence of knowingly or recklessly creating a false impression for the purpose of personal gain or causing loss to another person

19
Q

SECTION 91 OF FINANCAL SERVICES ACT

A

Make to another person a false statement if they:
- make the statement in course of arrangements of setting a relevant benchmark
- intend that the statement should be used for the purpose of setting of a relevant benchmark
- knowing the statement is false/misleading

Carry out an act or engage in any course of conduct which creates a false or misleading impression as to the price of value of any investment or as to the interest rate appropriate to any transaction.

20
Q

What is the penalty for breaching any of the requirements under Section 89-95 of the Financial Services Act 2012?

A

On summary conviction - a fine or a jail sentence not exceeding 12 months

On conviction on inducement - a jail sentence not exceeding 10 years or a fine

Offences committed up to 31 October 2021 will be subject to a jail sentence not exceeding 7 years

21
Q

What are the defences under Section 89-91?

A

FIRST - the person reasonably believed their act would not create a false or misleading impression

SECOND - actions, statements or forecasts that might relate to the price stabilisation rules. It allows market participants to support the price of a new issue of securities to make sure the market isn’t excessively volatile

THREE - statements/forecasts were made in conformity with the control of information rules of the FCA. Actions, statements and forecasts made on the basis of limited information.

22
Q

What is contained in a suspicious transaction and order report (STOR) is prescribed in UK MAR?

A
  • identification of the person submitting the STOR, their capacity and when dealing on own account or executing orders on behalf of third parties description of the order
    • type of order and type of trading
  • price and volume

reasons the order constitutes insider dealing, market manipulation or attempted insider dealing

means of identifying any person involved in the order

any other supporting documents which may be deemed relevant

23
Q

The FCA’s approach to market abuse

A

Number of enforcement cases and convictions

thematic review on anti-market abuse systems and controls

24
Q

FCA Fines for Market Abuse

A

FCA Fined CITIGROUP International broker dealer 12.6 million for not monitoring both orders and trades to detect potential and attempted market abuse since MAR was introduced in 2016

FCA fined Sigma Broking Limited £530,000 and fined former directors following market abuse reporting failures

25
Q

What will the FCA focus on for market abuse?

A
  • emphasizing the importance of firms business models
  • scrutinise the prudential aspects of their models
  • focus attention on firms’ risk management systems
  • monitor firms’ compliance with conduct of business standards
  • take action against market abuse
26
Q

For the purposes of UK MAR - what constitutes inside information?

A
  • information of a precise nature which has not been made public relating to a financial instrument
  • in relation to commodity derivatives, information of a precise nature which has not been made public in relation to a spot commodity contract or a derivative. If made public would have a significant effect on the price
  • for persons charged with the execution of orders concerning financial instruments, it also means information conveyed by a client and relating to client’s pending orders in financial instruments
27
Q

What is insider dealing defined as on UK MAR?

A
  • where a person possesses inside information and uses that information by acquiring or disposing of financial instruments
  • cancelling or amending an order concerning a financial instrument to which inside information relates
  • recommending another person to engage in insider dealing or inducing another person to engage in insider dealing
  • a person acquires/disposes of the financial instrument
  • a person cancels or amends an order
28
Q

What are securities defined as under CJA 1998?

A
  • shares
  • debt securities
  • depositary receipts
  • options
  • futures
  • CFDs based on securities
  • warrants

IT DOES NOT EMBRACE COMMODITIES , UNITS/SHARES IN COLLECTIVE INVESTMENT SCHEMES AND FOREIGN EXCHANGE as they are not price sensitive

29
Q

DEFENCES AGAINST INSIDER DEALING

A
  1. No advantage was expected – ie, the defendant did not expect the dealing to result in a profit (or the avoidance of a loss) due to information they possessed.
  2. The defendant believed the information had been widely disclosed and/or was widely known – having believed this on reasonable grounds.
  3. They would have dealt anyway – regardless of the information (for example, because they were in financial difficulties and would have had to sell their shares to meet their obligations).
  4. For the offence of disclosing only – they did not expect any person to deal because of the disclosure.
30
Q

What are the special defences for market makers against insider dealing

A

As long as a market maker can show they acted in good faith, they will not be deemed guilty of insider dealing - such as contractual or regulatory obligations

An insider is not guilty of dealing or encouraging others to deal if they can prove that the information they held was market information, and it was reasonable for them to act as they did, despite having the information at the time.

31
Q

What is the FCA’s power under FSMA for prosecution powers?

A

SECTION 401 and 402 to prosecute a range of criminal offences

The FCA’s general policy is to pursue through the criminal justice system all cases where criminal prosecution is appropriate. In particular, it is able to institute proceedings for an offence, under the CJA, for insider dealing

CPS can also prosecute it and the Secretary of State for Business, Enterprise and Regulatory Reform

32
Q

What will the FCA take into account when looking at market makers and whether it counts for insider dealing?

A
  • the extent to which the person is carrying out the order to hedge a risk
  • whether the relevant trading activity is connected with a transaction entered into or to be entered into with a client
  • the extent to which the behaviour was reasonable in the context of proper standards of conduct
33
Q

What factors will the FCA take into account when reviewing execution of client orders and whether it is legitimate

A
  • the person has complied with COBs
  • the person has agreed with its client it will act in a particular way when carrying out an order
  • the persons behaviour was facilitating the order
  • the persons behaviour was reasonable by the proper standards of the market
  • the relevant trading or bidding by that person connected with a transaction entered into or to be entered into with a client
34
Q

What counts as unlawful disclosures?

A
  • disclosure of inside information by the director of an issuer to another person in a social context
  • the selective briefing of analysts by directors of issuers or others who are persons discharging managerial responsibilities
35
Q

What will firms take into account to consider if behaviour amounts to manipulating transactions?

A
  • if a person has a purpose behind a transaction to induce others or bid for
  • if a person has another illegitimate reason to bid for or induce to position or move the price of
  • if the transaction was executed in a particular way
36
Q

What are Abusive squeezes

A

It occurs relatively frequently when the interaction of supply and demand leads to market tightness.
This is not of itself likely to be abusive

But it has influence on the supply and demand of an investment

The effects of an abusive squeeze are likely to be influenced by the extent to which other market users have failed to protect their own interests or fulfil their obligations in a manner consistent with the standards of behaviour to be expected of them in that market.

37
Q

What is the FCA’s penalty setting regime principles?

A

DISGORGEMENT - a firm should not benefit from any breach

DISCIPLINE - a firm should not be penalised for wrongdoing

DETERRENCE - any penalty imposed should deter the firm or individual who committed the breach

38
Q

What is the five step framework for the penalty setting regime?

A

STEP 1 - the removal of any financial benefit derived from the breach

STEP 2 - the determination of a figure which reflects the seriousness of the breach. Will decide between 0-40% of an income.

STEP 3 - Adjustment is made to the Step 2 figure to take account of any aggravating and mitigating circumstances

STEP 4 - upwards adjustment made to the amount arrived at after Steps 2 and 3

STEP 5 - If applicable a settlement discount will be applied

39
Q

What part of the sourcebook looks at fines for market abuse?

A

DEPP Sourcebook

DEPP 6.2 - Deciding whether to take action or not
DEPP 6.3 - penalties for market abuse
DEPP 6.4 - Financial penalty of public censure
DEPP 6.5 - determining the appropriate level of financial penalty

40
Q
A

LEVEL 6 Regulation and Compliance (17 decks)

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