MAD II/MAR introduces amendments to the original Market Abuse Directive of 2003. The objective of the new rules is to assure market integrity. These amendments were proposed by the EC in 2012 and comprise a directive that criminalizes insider dealing and market manipulation, and a separate market abuse regulation that addresses the issues of inside information and market abuse. Both the directive and the regulation were in force from 3 July 2016. However, the directive is not in scope of all EU member states.
The original market abuse directive consisted of only 10 pages and the actual implementation varied significantly across member states. The volume of MAD II/MAR has been extended to almost 250 pages in total. In addition to the criminal sanctions included by the directive, the regulation updates and strengthens the existing market abuse framework by extending its scope to new financial products (e.g. commodity derivatives and emission allowances), markets and trading strategies and by introducing requirements for topics such as market soundings and benchmarks.
The companies that fall within the scope of MAD II/MAR are determined by their use of financial instruments. Although there are specific requirements for issuers of financial instruments, other corporates that use financial products intensively are impacted by the rules as well.
Typical arrangements (instruments) used to prevent market abuse are: segregation of duties, Chinese walls, the four eyes principle, clean desk policies and restricting lists for financial products. Training of staff and the ability by staff to report suspicious practices without repercussions are essential for an effective market abuse-averse organization.
When implementing MAD II/MAR, it is important to consider the related requirements in MiFID 11/MiFIR. Ideally, a regulatory change program maps the requirements across inter-related rules such as MiFID, MAR. PRllPs KID and SFTR (Securities Financing Transactions Regulation). There are synergies that need to be identified and worked through. Failing to do so risks ineffective and inefficient implementation.
Author: Rob Voster