With just under 5 weeks to go before the Market Abuse Regulation comes into application across the EU, the European Securities and Markets Authority (ESMA) on Monday clarified that the obligations to detect and report market abuse under Article 16(2) of MAR (and the implementing technical standards once they are finalised) apply not just to investment firms under MiFID, but also to UCITS management companies, AIF managers and firms professionally engaged in trading on own account (proprietary traders) such as energy trading companies.
Article 16(2) of MAR requires persons professionally arranging or executing transactions to establish and maintain effective arrangements, systems and procedures to detect suspicious orders and transactions which might constitute insider dealing, market manipulation or attempted insider dealing or market manipulation and report them to the relevant competent authority.
Although ESMA had suggested in its Final Report of September 2015 that “persons professionally arranging or executing transactions” included non-MiFID firms, this clarification was not in the main text of the report, but somewhat tucked away amidst the feedback on p.162, at para. 236. AIFMs and UCITS management companies had continued to seek clarification from regulators as to whether they were in scope. EFET members (energy traders) had likewise sought confirmation that firms conducting own account trading (so not arranging or executing transactions on behalf of others) were out of scope of the requirement (either because “executing transactions” was to be distinguished from dealing because the former implies execution on behalf of another party, or because in acting on their own account they were not providing a professional service to a third party).
The Q&A that ESMA published on Monday points out that the definition of “person professionally arranging or executing transactions” (set out in Article 3(1)(28) of MAR) is activity-based and does not cross refer to definitions under MiFID, nor is there any reference in the definition that would limit the scope and exclude particular categories of persons regulated by other financial European legislation. Many other definitions in MAR depend on MiFID II definitions, and equivalent MiFID provisions. Since the definition is independent of MiFID, ESMA has concluded that Article 16(2) of MAR should not be considered to be limited to firms or entities providing investment services under MiFID.
Accordingly, the obligation to detect and identify market abuse or attempted market abuse under Article 16(2) of MAR applies broadly: ESMA states that buy side firms, such as investment management firms (AIFMs and UCITS managers), as well as firms professionally engaged in trading on own account (proprietary traders), will be within scope, and required to make suspicious transaction and order reports (STORs) from 3 July 2016.
The obligations under Article 16(2) and the associated technical standards (not yet finalised) are quite onerous, and firms will need to be able to capture orders, quotes and requests for quotes that are placed orally as well as those placed electronically, and those placed off-venue. The remaining time for implementing these arrangements is now quite short. Whilst outsourcing is permitted (with the usual regulatory caveats regarding proper oversight), firms are likely to struggle to find a fully MAR-compliant off-the-shelf product for order monitoring that will simply plug into their existing systems.
Firms may therefore reach for some tactical solutions in the shorter term, whilst updating policies and delivering refresher training, and planning for implementation of strategic and more automated solutions in the mid term, as regulatory expectations in this regard become clearer, and MAR-compliant products become more readily available. The fact that ESMA’s Q&A stresses that Article 16(2) arrangements should be proportionate to the scale, size and nature of their business activity (including the level of automation put in place in such systems) may give AIFMs, UCITS managers, and proprietary traders a degree of comfort in adopting such an approach.