#MAR_bitesize

Extra-territorial scope of MAR: impact on non-EU firms

Article 2(4) of MAR applies the "prohibitions and requirements" within MAR to behaviour that occurs both within the EU and in a third county.  In other words, MAR is intended to have extra-territorial effect, capturing individuals and firms operating outside of the EU. 

The extra-territorial application of the EU market abuse regime is not new: the Market Abuse Directive (MAD) also had extra-territorial effect and the FSA/FCA has previously pursued enforcement action against individuals and firms for market abuse committed from outside the EU.    

Firms had become accustomed to the EU market abuse regime as implemented under MAD.  Although this presented its own challenges, the range of instruments subject to MAD was relatively limited and readily identifiable.  The main obligation was to avoid committing the primary market abuse offences[1].  As many non-EU firms are subject to local market conduct requirements, the broad concepts of insider dealing and market manipulation were generally understood, even if the EU offences did not precisely mirror their local equivalents.  For these reasons, many firms were able to identify and accommodate the MAD requirements within the scope of their existing compliance framework.  In general, compliance was a matter of incremental change.    

Implementing the MAR requirements is proving less straightforward.  The broader changes MAR introduces mean that extra-territoriality is likely to assume both greater significance and result in additional complexity for non-EU firms.  Two changes, in particular, are likely to magnify the impact of extra-territoriality. 

1. Expansion of in-scope instruments 

   MAR has dramatically expanded the universe of instruments that are within the EU market abuse regime.  The scope is defined by reference to financial instruments traded on an EU trading venue (regulated markets, MTFs and (post MiFID II implementation) OTFs), as well as financial instruments "related" to those instruments because their price or value depends or has an effect on them, but covers over the counter trading in those instruments, and manipulative conduct in relation to benchmarks, or between the spot commodity and financial markets.      

   As a result of this expansion, it will be far easier for non-EU firms to be caught within the EU market abuse regime.  Activities previously considered to have no EU nexus may now be in scope.  Non-EU firms that may have relied on a high-level analysis of their activities are now likely to find that a more forensic approach is required.  Given the increasingly interconnected nature of global markets, there are likely to be few areas of their business where it will continue to be appropriate to rely on a broad assumption that MAR is not relevant. 

2. Ongoing compliance requirements 

   MAD focussed principally on the market abuse offences and imposed few specific compliance requirements.  MAR, by contrast, imposes much more detailed compliance requirements, including in respect of market soundings, disclosure of inside information, insider lists, market surveillance, suspicious transaction reporting and investment recommendations.  Where engaging in relevant activities, non-EU firms will also be subject to these requirements.  The move from prohibiting abusive behaviour to imposing ongoing compliance requirements is a significant (if not entirely unprecedented) change for non-EU firms.  Many of these requirements are either new or vary significantly[2] from equivalent non-EU requirements.  As opposed to incremental change, compliance is likely to involve the design, implementation and maintenance of new controls.     

   The most significant practical challenge faced by many non-EU firms will be to integrate the applicable MAR requirements into their existing compliance framework in a manner which both limits the impact on their activities and maintains operational simplicity.  In addition, some firms may have to take strategic decisions about the most appropriate way to apply substantive MAR requirements to business areas on the margins of the EU regime.      

Mark Staley