ESMA Final report: review of Market Abuse Regulation

ESMA has published its final report following a consultation on a wide-ranging review of the Market Abuse Regulation (MAR). This follows a formal request for technical advice, as MAR requires the European Commission (Commission) to report to the European Parliament and Council on the application of certain MAR provisions and whether MAR should be amended.

This Report is the first in-depth review of MAR since its implementation in 2016 and concludes that "overall, MAR has worked well in practice and is fit for purpose".

This insight covers the following areas of interest to corporates and their advisers: the definition of inside information and when disclosure of it can be delayed, market soundings, insider lists, PDMR dealings and the share buyback exemption.

Key points

ESMA's recommendations include:

• Definition of inside information: no change to the definition of inside information but guidance on specific scenarios would provide clarity

• Conditions for delaying disclosure: no change to the conditions for delaying disclosure of inside information but revision of ESMA's guidelines to provide further clarity and practical examples

• Notification if ceases to be inside information: no need to notify the National Competent Authority (NCA) about inside information for which disclosure has been delayed but then ceases to be inside information

• Market soundings: making market soundings mandatory not optional and introducing sanctions for violations of the market sounding requirements and procedures

• Insider lists: should continue to apply to persons who effectively accessed inside information, and not to those who could have accessed it. The scope of the persons who must keep an insider list should to be widened to include external service providers

• Permanent insider lists: to be retained

• Contact person: to allow an issuer to include on its insider list only one natural contact person for each legal person acting on its behalf or on its account

• PDMR transactions: retention of the current notification threshold of €5,000 and the ability for Member States to increase it to €20,000; and adding more exemptions. ESMA is not recommending that the restrictions on dealings in a MAR closed period (which currently only apply to PDMRs) be extended to issuers and closely associated persons

• Share buybacks: allowing issuers to report a share buyback to only one trading venue (which would be the most relevant in terms of liquidity); reducing the amount of information that must be reported; and allowing issuers to disclose share buyback transactions to the public on an aggregated basis

Definition of inside information

ESMA consulted on whether (i) there have been any difficulties in identifying what information is inside information and the timing of when information becomes inside information; (ii) the definition is sufficient to combat market abuse; and (iii) there is any inside information that is not covered by the definition. It also raised specific questions on commodity derivatives, front running and pre-hedging which are not covered in this insight.

ESMA agrees with the overall responses that the definition of inside information (in Article 7) is sufficiently broad to combat market abuse and has concluded that the Commission should leave the definition of inside information unchanged (except for one proposed amendment to Article 7(1)(d)). Part of the reason for this is that any changes to the definition could have unintended consequences as the definition is used throughout MAR and it would be better to provide additional guidance instead.

Respondents requested clarification on several aspects of the definition which ESMA thinks deserve thorough analysis to avoid adopting interpretations or recommending practices which could have unintended consequences. And ESMA is ready to issue guidance on the definition of inside information under MAR. The report notes that, as a first step, "ESMA considers that guidance on specific scenarios (for instance, financial reporting) may provide a better assistance to issuers, as it could enhance clarity on concrete and recurring issues they face."

Delayed disclosure of inside information

Whether the conditions for delay are sufficiently clear for issuers: the replies indicate that the mechanism is perceived as working, even though there is room for clarification. But significant discrepancies were noted across Member States in the numbers of notifications of delayed disclosure cases.

ESMA considers that the delayed disclosure regime is "intimately interconnected" to the inside information definition. So, any clarification of that definition (as noted above) will impact when information should be considered to be inside information, and therefore on the ability to delay its disclosure. The guidance that ESMA is ready to provide on the definition of inside information should also assist issuers when deciding whether they can delay disclosure. For instance, clarification on inside information concerning intermediate steps or protracted processes and financial statements is likely to affect the use of delayed disclosure in those two cases.

ESMA does not think that any amendments to the conditions to delay disclosure of inside information are necessary and is not recommending any changes.

ESMA is, however, keen to consider a revision of its guidelines, to provide further clarity on the conditions that need to be met to delay disclosure of inside information and to provide further practical examples of when disclosure may be delayed. Other areas where clarification may be beneficial are what is meant by disclosing 'as soon as possible' and what should happen if there are rumours.

Whether an issuer should have to notify the NCA when disclosure of inside information has been delayed but it then ceases to be inside information: ESMA is not recommending that this be introduced. NCAs can already gather enough information, through their market surveillance activity, about possible cases of insider dealing or attempted insider dealing.

Market soundings

ESMA is recommending that:

• Article 11 is amended to make it clear that DMPs carrying out a sounding must comply with the Article 11 provisions - they are not optional. Compliance with those provisions will then result in the behaviour falling within the exception to unlawful disclosure of inside information. The responses had shown that there was a divergence of opinion as to whether Article 11 was optional or not. ESMA is making this recommendation even though several respondents (including AFME and CLLS) advised against making market soundings mandatory. The reasons given included that it would create undue process where the transaction has little European nexus or where there is no inside information whatsoever;
• sanctions be added to MAR for violations of the market sounding requirements and procedures, without prejudice to any additional sanction where unlawful disclosure of inside information has been committed; and
• the obligation for the persons receiving the market soundings to carry out their own assessment as to whether they are in possession or cease to be in possession of inside information should be maintained.

ESMA is not recommending narrowing the scope of the definition of market sounding and is not convinced that certain types of transaction, such as Euro private placement of bonds, M&As or block trades, should be explicitly excluded from the scope of the market sounding regime.

ESMA is proposing that the reference to "prior to the announcement of a transaction" in the definition of market soundings be amended to "prior to the announcement of a transaction, if any", to include those cases where eventually the transaction does not materialise or does not amount to inside information and so is not announced.

ESMA agrees that the procedures and requirements for carrying out market soundings could be simplified and is recommending that:

• for soundings where NO inside information is passed on - Article 11(5) (a) to (d) and Article 11(6) of MAR should not apply;
• for soundings where inside information is passed on - clarification that (i) the requirement to cleanse (in Article 11(6)) could be waived if the transaction is publicly announced; (ii) where recording facilities are not available, written minutes of the sounding agreed and exchanged by email or other electronic means between the DMP and person receiving the sounding should suffice, with no need to have a more formal exchange of signatures; and (iii) the requirement to repeat reminders of the wall crossing requirements could be removed for follow up calls after the initial one; and
• for all market soundings - ESMA amends its own Guidelines to introduce recommendations for persons receiving the market soundings that are modulated on the nature of those persons (eg differentiating between natural and legal persons, regulated and non-regulated entities, SMEs and large cap issuers).

However, a number of other proposals from respondents to simplify the administrative burden of the market sounding regime have not been taken forward. For example, ESMA has not supported the suggestion that where market soundings are made by a company together with its advisers, the company could delegate compliance with the market sounding regime to its adviser. This would have made it far more straightforward for companies to participate more actively in the process to the benefit of investors.

Insider lists

ESMA has concluded that insider lists remain a key tool in market abuse investigations undertaken by NCAs and are widely used by them. ESMA considers that the insider list also provides other benefits in relation to the management of inside information for issuers (namely they contribute to making informed decisions about personal account dealing trades, investigating alerts following an employee trading warning, checking possible wall crossing and/or inappropriate disclosure).

As such, ESMA recommends keeping the insider lists regime, with the amendments described below.

Actual or potential access to inside information: ESMA has maintained its view that insider lists should only include persons who effectively accessed a piece of inside information, and not those who could have done that.

ESMA has therefore concluded that issuers (and persons acting on their behalf or on their account) should include in their respective insider lists the persons who, to the best of their knowledge, have effectively accessed a piece of inside information.

If there is doubt about whether someone had effective access, it is acceptable to include anyone who could potentially have accessed a piece of inside information. ESMA does not think that MAR needs to be amended to reflect this but that it would be useful to clarify this in a recital.

Whether external service providers should have to keep insider lists: ESMA remains of the view that any person accessing inside information due to a professional relationship with the issuer, that has been informed by the issuer that it has access to inside information and has shared that information with other persons should be subject to the obligation to draw up and maintain insider lists.

ESMA therefore considers that the reference to "persons acting on behalf or on the account of the issuer" in Article 18(1) could be complemented by adding a reference to external service providers, with the addition of "or otherwise performing tasks for the issuer, through which they got access to a piece of inside information and shared it with other persons". That addition could be completed with a recital clarifying that the new wording encompasses the performance of any professional services for the issuer, directly or indirectly, or for persons acting on its behalf or on its account, including auditors (appointed by the issuer), notaries, consultants, credit institutions and financial intermediaries involved in financing relevant deals or in the offering of the issuer's financial instruments; and financial intermediaries acting under the rules of a trading venue in an independent role (this latter category could include liquidity providers, specialists or firms assisting a company through the admission process and who are responsible for assessing the appropriateness of a company seeking admission).

Usefulness of the permanent insider section and who should be included in that section: most responses were in support of maintaining this section and ESMA has concluded that no changes need to be made. ESMA remains of the view that this section should only include a limited group of individuals and should under no circumstances substitute the event-based insider list. ESMA agrees with some responses that the persons that could be included in the permanent insider section may be broader than the list included in the consultation paper.

Allowing the issuer to include on its insider list one contact person at an external service provider and for the service provider to then keep its own list with the details of everyone who has access to the issuer's inside information: ESMA recommends revising Article 18 to allow:

• the issuer to include only one natural contact person for each legal person acting on its behalf or on its account (or performing tasks for the issuer through which they got access to inside information); and
• that persons acting on behalf or on the account of the issuer (or performing tasks for the issuer through which they got access to inside information) should be allowed to include in their own insider list only one contact person for each external provider.

Article 18 should also be amended to clarify that the issuer's responsibility strictly refers to the inclusion in its insider list of the following persons having access to inside information:

• persons working for it under a contract of employment;
• its external service providers; and
• when the external service providers are legal persons, one natural contact person for each external service provider.

No changes are proposed to the content of the insider list but ESMA concludes that there is no legal obstacle to storing personal data separately or as to the means or the format used to store the data as long as the issuer and persons acting on its behalf or on its account (and in due course, those performing tasks for it) can create the insider list when requested by the NCA.

PDMR transactions

€5,000 threshold: ESMA recommends keeping the current notification threshold of €5,000 and that the ability for Member States to increase it to €20,000 should be maintained to differentiate those markets for which the lower threshold is less meaningful. Although suggestions were made, ESMA has decided not to propose any changes to how subsequent notifications must be made once the initial threshold has been met.

ESMA received some requests for clarifications on pragmatic aspects of the notifications, on which ESMA intends to issue guidance.

Several respondents also expressed views on aspects of Article 19 of MAR which were not specifically in the consultation, including a request to simplify it for closely associated persons. ESMA has, however, concluded that, notwithstanding the burden for issuers and PDMRs, the notification obligations should continue to apply to closely associated persons and issuers should continue to keep lists of closely associated persons as they provide relevant information for NCAs.

EMSA is not recommending any changes to the 20% thresholds in Articles 19 (1) (a) and (b) which are working adequately.

Restrictions on dealings in a MAR closed period (which currently only applies to PDMRs) should be extended to issuers and to persons closely associated with PDMRs: ESMA is not recommending the extension to issuers and closely associated persons.

Whether the exemptions that allow trading in a closed period should be extended to cover other situations: ESMA recommends that the exemptions in Article 19(12) should be extended by:

• including financial instruments other than shares in the exemption for transactions made under, or related to, an employee share or saving scheme, qualification or entitlement of shares, or transactions where the beneficial interest in the relevant security does not change;
• allowing the acquisition of an issuer's financial instruments based on shares or dividends reinvestments arrangements, provided that such arrangements were entered into outside of a closed period, are irrevocable and may not be amended, and the PDMR may not amend or cancel their participation in such arrangements;
• exempting from the closed period trading prohibition discretionary asset management mandates, provided that: (i) the mandate to the asset manager was entered into outside of the closed period and is not revoked during the closed period, and (ii) any notifications by the PDMR under Article 19(1) state that the transactions were executed by an independent third party in the context of a discretionary asset management mandate;
• including as an exempt transaction those resulting from corporate actions approved by the board (or other relevant body) and the shareholders, provided that (i) PDMRs are not receiving advantageous treatment when compared to other shareholders; and (ii) there is no inside information about the relevant corporate action during the closed period;
• including as an exempt transaction the acceptance of inheritances, gifts or donations; and
• including as an exempt transaction the exercise of options, futures or other derivatives when the main terms of the transaction (including price and volume) were agreed outside of the closed period.

Announcement of financial results to end closed period: although clarifications were requested by respondents to the consultation, ESMA is not recommending any amendments to the criteria for identifying when the closed period starts and ends.

Share buybacks

ESMA considered the scope of the current reporting obligations and the content of the information that must be reported to fall within the share buyback exemption.

ESMA is recommending the following changes:

• allowing issuers to report a share buyback to only one trading venue (which would be the most relevant in terms of liquidity) instead of the current requirement to report each transaction to the NCAs of all trading venues on which the shares are admitted to trading or traded. That NCA would then, on request, forward the information to other trading venues where those shares are admitted to trading;
• reducing the amount of information that must be reported. The reference to information in MiFIR should be deleted and a separate shorter list should be set out in Level 2 text; and
• allowing issuers to disclose share buyback transactions to the public on an aggregated basis.

In its response, AFME had asked for changes to procedures to apply to stabilisation activities as well, but this hasn't been addressed by ESMA.

Systems and controls

ESMA has concluded that there is no need for an explicit obligation in MAR as those systems and controls are in effect already needed so that an issuer can assess if and when certain information becomes inside information to allow it to comply with the obligation to disclose any inside information as soon as possible.

Instead ESMA intends to stress the importance of establishing such systems and controls and monitoring their effectiveness. Based on its size, sector of activity and specific features, each issuer should tailor the relevant controls to its business and structure. The report notes: "Especially when considering delaying the disclosure, it is fundamental to have robust processes to handle and manage the inside information and to thoroughly assess the presence of the conditions enabling such delay."

Next steps

The report will be submitted to the EU Commission and is expected to feed into its review of MAR. ESMA states that it is ready to provide further technical assistance to develop the legislative amendments suggested in the report.