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RebuildingRiskandCompliancefortheAgeofOversight

SponsoredbyCognizant

MarketAbuse:AreWeGoingMAD?
MagnusAlmqvist,SunGard
26March2015

TheMarketsAbuseDirectiveIIwillrequirefirmstocarefullyreviewandpotentiallyupdateboththeirtechnologyand
operationalprocesses,whileadministrativesanctionswillmakenoncomplianceagreaterrisktoboththebottomline
andafirmsreputation.Butisitgettingtheattentionthatitdeserves?Heresacloserlookattherequirements.
Theresanotherlargeregulatorychangecoming,andfortheaverageassetmanagers,banksandbrokers,itspotentiallyasbigasMiFIDII.
Thenewdirective,whichistobeimplementedin2016,isknownasMADII,ortheMarketsAbuseDirectiveII.Itincludeslarge,sweeping
changesthatwillimpactfirmsmarketabusesurveillanceprocessesandsolutions,aswellastheirpersonalaccount(PA)dealingand
conflictsmanagementprocesses.
ButisMADIIgettingtheattentionthatitdeserves?Couldthisbeanopportunityforthewellstructuredfinancialfirmthatispreparedto
investandstayaheadoftheregulatorycurvetocreatesomecompetitiveadvantage?
MADIIinaNutshell
IssuedbytheEuropeanSecuritiesandMarketsAuthority(ESMA),MADIIupdatesthecurrentmarketabuseregimetoreflectcurrent
marketpracticeandbemoreflexibleintheanticipationoffuturechanges.Itconsistsoftwodocuments:theMarketAbuseRegulation
(MAR)andtheDirectiveonCriminalSanctionsforMarketAbuse(CSMAD).
MADIIimpactsinvestmentfirmsthattradefinancialinstrumentsasdefinedbyMiFIDIIandMADII.Aninvestmentfirmconsistsofone
ofthefollowing:

Investmentbanks
Portfoliomanagers

Stockbrokersandbrokerdealers
Corporatefinancefirms
Manyfuturesandoptionsfirms
Somecommoditiesfirms
TheMiFIDIIdefinitionofafinancialinstrumentisdefinedinMiFIDII,Annex1,SectionC.
4KeyEffectsofMADII
MADIIsetsourfourkeychangestothemarketabuseregime:

Abroaderscopeofthemarketabuserulestocapturenewmarkets,notablythespotcommoditiesmarketsandmultilateral
tradingfacilities.
Updatestoreflectrecentmarketdevelopments,suchasemissionallowancestradingandhighfrequencytrading.
Theharmonizationoftheapplicationofmarketabuserules,exemptionsandsanctionsacrosstheEU.
Strongeradministrativesanctionsformarketabuseandtheintroductionofcriminalsanctionsforthefirsttimeacrossthe
EUmarketabuseisalreadyacriminaloffenceintheU.K.
TakingaCloserLook
MARwillapplytofinancialinstruments(asdefinedmyMiFIDII)admittedtotradingonanEUregulatedmarket,aswellastofinancial
instrumentsthatare:

Tradedonorganizedtradingfacilities
Traded,admittedtotrading,orforwhicharequestforadmissiontotradingonamultilateraltradingfacilityhasbeen
made.
TradedoverthecounterandthathaveaneffectonthepriceorvalueoffinancialinstrumentssubjecttoMAR.
TradedpursuanttoEURegulation1031/2010(i.e.,emissionsallowances).
MARalsoincreasesthescopeofmarketmanipulationinordertocapturecrossmarketbehaviorsbywhichtransactionsconductedon
derivativesmarketsaffectthepriceorvalueofcommoditiesontheunderlyingspotmarkets,andviceversa.
[Related:The7PillarsofMarketSurveillance2.0Pillar#4:CrossAssetClassMonitoring]
MADIIincludesanumberofotherinsiderdealingandmarketmanipulationchangesaswell.Itdefinesinsiderdealingandmarket
manipulationas:

Givingmisleadingsignalsaboutthesupply,demandorprice,orsecuringthepriceatanartificiallevel,unlessan

acceptedmarketpracticeapplies(seebelow).
Affectingpricebymeansofafictitiousdeviceorotherdeceptionorcontrivance.
Disseminatinginformationthatgivesmisleadingsignalsaboutthesupply,demandorprice,orsecuresthepriceatan
artificiallevel,wherethedisseminatorknowsoroughttoknowtheinformationwasfalseormisleading.
Manipulatingbenchmarks,particularlybytransmittingfalseormisleadinginformationorprovidingmisleadinginputs
wheretheperpetratorknowsoroughttoknowthattheinformationorinputsarefalseormisleading.
Securingadominantpositionoversupplyordemandwiththeeffectoffixingpricesorcreatingotherunfairtrading
conditions.
Tradingattheopeningorcloseofthemarketwiththeeffectofmisleadinginvestorsastoopeningandclosingprices.
Placing,cancellingormodifyingorders(includingbymeansofalgorithmsorhighfrequencytrading)tomanipulate
supply,demandorpriceby:disruptingordelayingthetradingsystem(e.g.,byquotestuffing)obscuringgenuine
orders,particularlybyoverloadingordestabilizingtheorderbook(layering)enteringorderstoinitiateorexacerbatea
trend(momentumignition).
Takingapositiononsecuritiesbeforeprofitingfromthatpositionbypubliclyvoicingviathemediaanopinionabout
suchsecuritiesortheirissuer(pumpanddumportrashandcash)thisdoesnotconstitutemarketmanipulationifthe
conflictofinterestissimultaneouslyandeffectivelydisclosed.
Buyingorsellingemissionsallowancesorderivativesthereoftofixauctionpricesatanartificiallevelorotherwise
misleadbidders.
Inmostcasesitisenoughthatthebehaviorislikelytobringaboutthestatedeffect.Attemptedmarketmanipulationisalsoprohibited.
IntermsofPAdealingchanges,notificationofmanagerstransactionsmustbemadewithinthreebusinessdaysofthetransaction.In
addition:

Themanagermustnotifytheissuerandthecompetentauthorityofthetransaction.
Theissuermustpublishdetailsofthetransaction,includingtheidentityofthemanager,thenatureofthetransactionand
itsprice.
Thereisaclosedperiodof30daysbeforetheannouncementoftheissuersinterimoryearendaccounts.
Inaddition,issuingcompanieslistedcompaniesorcompaniesthatlistanykindoffinancialproductneedtokeepanuptodatedetailed
logoftheirinsiders.AccordingtoArticle18(3)and(4)ofMAR,theinsiderlistshouldattheminimumdocument:

Theidentityofanypersonhavingaccesstoinsiderinformation.
Thereasonforbeingincludedinthelist.
Thedateandtimeatwhichsuchpersonobtainedaccesstoinsideinformation.
Thedateandtimeatwhichsuchpersonceasedtohaveaccesstoinsideinformation.
Thedateatwhichtheinsiderlistwascreatedandupdated.
Inordertoascertaintheidentityofpersonswithaccesstoinsiderinformation,theinsiderlogmustincludethefollowinginformationabout
eachperson:

Name(firstname,surname,birthsurname)
Homeaddress(address,postalcode,city,country)
Workaddress
Nationalidentificationnumber(ifapplicable,inaccordancewithnationallaw),orotherwise,thedateandplaceofbirth
Home,workandmobiletelephonenumbers
Personalandworkemailaddresses
Theeffectonthecomplianceorganization
FirmsthatfallunderMADIIsremitwillneedtoupdatetheircomplianceprocessesandtoolstomatchthenewrequirementsespecially
thePAdealingrequirementsandthebroadenedscopeofproductcoverage.Forexample,compliancesolutionswillneedtobeabletohandle
newsetsofdataandproductsaswellashavethecapabilitytomonitorfornewpatternsandindicators.Inaddition,firmswillneedto
considerthenewdirectiveanytimetheyintroducenewproducts.
AselementsofMADIIbegintogointoeffectshortly,theseupdatestotechnologyandprocesseswillhavetobemadequickly.
MADII:TheTimeline

TechnicalStandardandTechnicalAdviceisexpectedduringQ12015.
MARcomesintoforceonJuly3,2016.
CSMADistransposedintonationallawasofJuly3,2016whiletheU.K.hasnotoptedintoCSMAD,thegovernment
hasindicatedthatitintendstooptinatalaterdatefollowingfurthernegotiation.
Inconclusion
SomeimportantquestionsaboutMADIIremain.Forexample,whatproductsareactuallycovered?TheOTCstatementisvague,referring
onlytoproductstradedoverthecounterandwhichhaveaneffectonthepriceorvalueoffinancialinstrumentssubjecttoMAR.In
addition,ESMAhasnotyetpublishedaclearlistofOTCproductsaspartoftheimplementingdirective,whichissomethingmarket
participantsareaskingforaspartoftheconsultationprocess.
Butfirmscantwaitforthesequestionstobeanswered.WhileMiFIDIIhasbeengettingtheheadlines,MADIIactuallycomesintoeffect
sixmonthsbeforeMiFIDIIdoes.Moreover,itsimpactshouldnotunderestimated.Thebroaderscopeandupdatesfornewmarket
developmentswillrequirefirmstocarefullyreviewandpotentiallyupdateboththeirtechnologyandoperationalprocesses,whilethe
strongeradministrativesanctionswillmakenoncomplianceagreaterrisktoboththebottomlineandsomethingevenmoreimportant:
reputation.
Thosethatareaheadofthecurvestandapossibilitytobeatthecompetitionandusetheseregulatorychangestotheircompetitiveadvantage.
Butittakesresolveandcommitmenttoinvestintheresources,processesandsolutionsneededtosupportthesechanges.

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