ESMA preparatory work on the Market Abuse Regulation: time to engage with the development of regulatory technical standards

ESMA has published a Discussion Paper ("DP") as part of its preparatory work on the forthcoming Market Abuse Regulation ("MAR").  ESMA has asked for responses by 27 January 2014.  The DP raises 113 specific questions overall, covering the ten sections of MAR on which ESMA is intended to provide input.  It is important that industry should engage at this stage of the process, before more concrete proposals are developed, to help ESMA ensure that the standards being developed are practically workable, achieving MAR's aims without inhibiting legitimate business, or relations between listed companies and their investors.     

ESMA intends to consider feedback from this consultation in Q1 2014 and incorporate the results into a full consultation on ESMA's draft regulatory technical standards (RTS) and Technical Advice to the Commission, probably in spring 2014.   Timing for the full consultation depends on the publication of the final version of MAR (the DP is based on the version of the MAR Level 1 text agreed on 25 June 2013 - see also the position of the European Parliament adopted at first reading on 10 September 2013). 

The DP covers the following areas:

1. Buyback programmes and stabilisation: Article 3 of MAR

• Buy-back programmes
  • General conditions that buy-backs must meet
  • Disclosure and reporting obligations
    • Channels of public disclosure
    • Content of public disclosure
    • Deadline for public disclosure
    • Disclosure towards competent authorities
  • Conditions for trading
    • Price and time limitations
      • Multi-listings
      • Auctions
    • Volume limitations
  • Restrictions to trading
• Stabilisation measures
  • Restrictions regarding the time of stabilization measures (stabilization period)
    • Shares and securities equivalent to shares
    • Bonds and other forms of securitised debts (not convertible or exchangeable into shares or into other securities equivalent to shares)
    • Securitised debt convertible or exchangeable into shares or into other securities equivalent to shares
  • Disclosure and reporting obligations
    • Transparency conditions for offers under the scope of the Prospectus Directive
    • Transparency conditions for offers not under the scope of the Prospectus Directive
      • Details which have to be disclosed
      • Responsible person for disclosure
    • Issues with respect to recording and reporting conditions
  • Price conditions
  • “Ancillary stabilisation”
  • Sell side trading during stabilisation periods and “refreshing the green shoe”.
  • “Block-trades”

2. Market soundings: Article 7c of MAR

• General
  • Link to issuer
  • ‘Block trades’
• Proposed standards prior to conducting a market sounding
  • Determining what information to disclose
  • Characterising the information to be disclosed
  • Information and issuer’s agreement in case of market soundings conducted on its behalf
  • Determining which investors to question
• Timing of market soundings
• Obtaining buy side’s agreement
  • The buy side’s wish (not) to be wall-crossed - possible options
    • simply seeking buy-side consent/record consent or refusal
    • also requiring disclosing participant to list of clients who have indicated they never want to be wall-crossed and not contact them
    • also requiring disclosing market participant to maintain up-to date record of buy-side general wishes (requires systematic questioning)
• Record keeping requirements imposed on the disclosing market participant
  • General record of compliance with all processes/procedures required by RTS
  • Scripts
    • Non-wall-crossed sounding scripts
    • Wall-crossed sounding scripts
  • Sounding lists
  • Point of contact at the buy-side firm, if any
  • Recorded lines
  • Written confirmations ex-post
• The disclosing market participant’s internal processes and controls
  • Preparing and reviewing the procedure governing market soundings
  • Employees of the disclosing market participant responsible for conducting the market sounding
• ESMA guidelines for the buy-side
  • Communicating the desire not to be wall-crossed
  • Practical organisation of market soundings
  • Recording its own assessment
  • Discrepancies of opinion
  • Possible consequences for the buy-side of discrepancies of opinion
  • Reporting improper disclosure
  • The buy side’s assessment of related securities
  • Cleansing
  • Recording follow-up calls
• Planning for cleansing - two options under consideration
  • Option 1: need for discussion on a possible cleansing strategy
  • Option 2: Requirement for agreement on a cleansing strategy

3. Indicators and signals of market manipulation: Article 8(5) MAR

• Types of practices of market manipulation
  • practices related to benchmarks
  • use of access to trading facilities/platform
• Indicators/signals of market manipulation
  • High ratio of cancelled orders (e.g. order to trade ratio) which may be combined with a ratio on volume (e.g. number of financial instruments per order)
    • cancellation rate
    • order to trade ratio
  • Cross-venue and cross-product market manipulation
  • Topics relating to specificities arising in an automated trading environment
    • From when does an inflow of orders become difficult to analyse and thus potentially constitute an indicator of quote stuffing
    • What tools should be used or developed in order to allow for a better detection of the indicators of manipulative behaviour in an automated trading environment

4. Criteria for Accepted Market Practices ("AMP"): Article 8a(5) of MAR

• Specific practices in conformity with the rules of a trading venue (RM, MTF or OTF) already reviewed by the relevant competent authorities, deemed not manipulative by themselves, and will not be given AMP status
• Criteria to establish an AMP:
  • A substantial level of transparency to the market
  • Ensures a high degree of safeguards to the operation of market forces and the proper interplay of the forces of supply and demand
  • A positive impact on market liquidity and efficiency
  • Does not create risks for the integrity of, directly or indirectly, related markets, whether regulated or not, in the relevant financial instrument within the whole Union
  • The outcome of any investigation of the relevant market practice by any competent authority or other authority, in particular whether the relevant market practice breached rules or regulations designed to prevent market abuse, or codes of conduct, be it on the market in question or on directly or indirectly related markets within the Union
  • The structural characteristics of the relevant market including whether it is regulated or not, the types of financial instruments traded and the type of market participants, including the extent of retail investors’ participation in the relevant market

5. Suspicious transactions and order reporting: Article 11 of MAR

• The reporting obligations
  • Attempted market abuse (including reporting of orders)
  • Reporting by trading venues
• Level of suspicion required
  • Timing of STRs
  • Partial view
• Detection
  • Proactive surveillance
  • Automated surveillance systems
  • Detection: other issues, such as training and culture
• Content of STRs
• New harmonised STRs in six sections, with suggested content:
  • Transactions/orders
    • Additional elements in relation to OTC derivatives
  • Identity of entity/person making disclosure
  • Identity of entity/person suspected of breach
  • Description of suspected breach or attempted breach
  • Documentation to be attached
  • Additional information
• STR template
• Record-keeping
  • including decisions regarding near misses

6. Public disclosure of inside information and the conditions for delay: Article 11 of MAR

• ESMA is not consulting on minimum thresholds of CO2 equivalent and rated thermal input for the purpose of the exemption of certain emission allowances market participants at this stage
• Means for appropriate disclosure of inside information
  • Channels for appropriate public disclosure - similar to TD requirements for the dissemination of information to all issuers of RM/MTF/OTF financial instruments
  • Inside information already disclosed
  • Posting on the issuer’s website
• Delaying disclosure of inside information
  • Determination of the relevant competent authority for notification of delays by issuers of financial instruments
    • Transaction Reporting MiFID based approach
    • Prospectus Directive based approach
    • Transparency Directive based approach
  • Determination of the relevant competent authority for notification of delays by emission allowances market participants
  • Technical means for delaying disclosure of inside information
    • “General” delays
      • Procedures and arrangements within the issuer
      • Format and content of the notification
      • Emission allowances market participants
    • Specific delays to preserve the financial stability
• Guidelines on legitimate interests and omission likely to mislead the public
  • Legitimate interests
  • Situations where omitted disclosure is likely to mislead the public

7. Insider lists: Article 13 of MAR

• Standards for Format
  • Identity of any person having access to inside information
    • Name: First name, Surname, birth surname , date and place of birth
    • Home Address: Address, postal code City and Country
    • Work address (specify if branch or head office)
    • ‘National Identification Number’ (if applicable, in accordance with national law)
    • Home, Work and mobile telephone numbers
    • Personal and work e-mail addresses
  • Reason for being included on the list
    • the function and employer’s/company name (if an outside agent) of the insider in the insider list
  • Date on which the list of insiders was created and updated
    • proposed format allows for the creation of one single consolidated list, electronically created and stored, constantly updated to reflect additions and removals
    • both the date of update and the specific change made be easily identifiable by the competent authority
  • Date and time at which such person obtained inside information; and the date and time at which such person ceased to have access to inside information
    • relevant time zone to be specified (for example CET or GMT)
  • Option to maintain separate insider lists for specific projects, provided the proposed format is used.
  • Option to use the official language of the relevant competent authority or language which is customary in the sphere of international finance
  • Standards for submission to competent authorities
    • standardised electronic format and storage
    • an encrypted email or other channel offered by competent authority with same level of security
    • technical format for the insider list including the necessary technical details about the information to be provided (e.g. standards to use, length of the information fields…)?
• Procedure for updating insider lists
• SME Growth Markets

8. Managers’ transactions: Article 14 of MAR

• Basic characteristics
  • Additional non-exhaustive list of types of transactions triggering the requirement
•  Timeframe and means for notification and disclosure - aggregation options
  • transactions in the same financial instrument executed on the same day and at exactly the same price could be aggregated by purchases and by sales but not netted
  • aggregation on a per order basis with price to report as the average weighted price.
  • aggregation of all transactions on a financial instrument on the same day (but not netted) indicating the timeframe of the executions and the price range (lowest and highest prices of executed transactions) and/or the weighted average price
• Trading Window
  • In relation to transactions under exceptional circumstances
  • In relation to the other types of dealing

9. Fair presentation and disclosure of conflicts of interests by producers and disseminators of investment recommendations: Article 15 of MAR

• Publication of recommendations “intended for distribution channels or for the public”
  • when distributed through RIS or media specialised in disseminating information (news agency, news provider, a newspaper, etc.) or when put on the website of the producer
  • when intended or expected to be distributed to clients or to a specific segment of clients, whatever their number, as a non-personal recommendation
• Production of recommendations
  • Identity of the producers
  • Objective presentation of investment recommendations
  • General standard
  • Additional obligations for “financial analysts”
  • Transparency of the methodology
  • Disclosure of interests and conflicts of interests
  • General standard
  • Additional obligations for “financial analysts”
  • Thresholds for conflicts of interest
    • uniform disclosure criteria set at an appropriate level - reduce to 3%?
    • disclosure for net short positions opened for reasons different from market making activities?
    • disclosure for positions in debt instruments, such as bonds, structured finance products and related derivatives contracts (e.g. CFD, equity swaps or derivatives on indexes or baskets)?
    • additional specific thresholds for other ‘non-equities’ financial instruments?
  • Details on the distribution of previous recommendations
    • require analysis of gap between market price and price target?
  • Requirement to properly disclose conflicts of interest
• Non-written recommendations
  • a case-by-case assessment for non-written recommendations or specific rules ?
• Dissemination of recommendations produced by third parties

10. Reporting of violations: Article 29 of MAR

• Procedures for the receipt of reports of breaches and their follow-up
  • usually written notification, including through electronic channels (e-mails)
  • proper recording of oral notifications through telephone calls
  • recorded or minuted interviews or physical meetings with the specialised / dedicated line or team
  • lack of supporting documentation not a bar, but “reasonable suspicion”
    • indicative list of elements that could be included
• Protection for the reporting and for the reported persons
  • Maintaining records of name, email and contact details by competent authority in restricted access system
  • At minimum, compliance with EU Data Protection Directive
  • Warning that confidentiality may not be ensured if:
    • disclosure of identity required by law
    • subsequent enquiries make it possible for the employer to accurately assume the whistle-blower’s and/or reported person’s identity
    • competent authority needs to disclose the whistle-blower’s and/or reported person’s identities to further its investigation (with prior consent if possible)
  • Transmission to minimum possible number of persons within the competent authority
  • Protection of identity of reported persons in the same manner, save where disclosure required for enforcement proceedings
  • Clarify to whistleblower very limited feedback about the outcome of the provision and investigation of information, due to statutory restrictions
• Requirement for regulated firms to have appropriate procedures for their employees to report breaches internally through a specific, independent and autonomous channel that ensures protection and confidentiality