Market Abuse Regulation: how it applies to fund management companies

The Market Abuse Regulation (MAR) continues to be a priority for regulators and authorities to maintain the transparency and integrity of European financial markets. The fund management companies make no exception.

According to the European Securities and Markets Authority (ESMA), the financial penalties for administrative sanctions totalled over 50,000 euros in 2021 only. Meanwhile, the fines for criminal infringements of the regulation amounted to more than 5 million euros.

In this article, we will explore the MAR, how it applies to fund management companies, and what you need to do to comply.

What is the Market Abuse Regulation?

The Market Abuse Regulation is a set of rules developed by the European Union to prevent, detect, and report criminal activities in the financial markets, such as insider trading, unlawful disclosure of inside information, and market manipulation.

These rules aim to enhance market transparency, protect investors, and stay current with the financial market developments in Europe.

What is covered by the Market Abuse Regulation?

The Market Abuse Regulation (596/2014) covers the financial instruments defined in Article 2. To summarise, the provisions of this law apply to the following financial instruments:

1. Financial instruments traded on a multilateral trading facility platform (MTF).
2. Financial instruments traded on an organised trading facility platform (OTF).
3. Financial instruments whose value depends on or affects another financial instrument referred to previously.

Who is affected by the Market Abuse Regulation?

Regardless of the industry, all actors who are professionally arranging or executing transactions are affected by the Market Abuse Regulation.

To fulfil their MAR obligations, these actors must establish and maintain effective measures, systems, and procedures to detect and report suspicious orders and transactions.

If an actor suspects that an order or transaction constitutes or may constitute insider dealing or market manipulation, they must notify the country's competent authority.

To be more concise, the European Securities and Markets Authority (ESMA) explains that the obligation to detect and identify criminal activities under MAR also applies to "the buy side firms, such as investment management firms". This definition also includes fund management companies.

How can fund management companies comply with the Market Abuse Regulation?

Fund management companies must set adequate arrangements, systems, and procedures through continuous market surveillance to comply with the rules and control the prevalence of market abuse.

Market surveillance is the continuous monitoring of financial markets to detect and prevent market abuse.

It involves analysing all orders and transactions and detecting any suspicious activity that may indicate criminal activity, such as market manipulation, insider trading, or other forms of market abuse.

The European Securities and Markets Authority (ESMA) has issued Regulatory Technical Standards (RTS) that set out the requirements for market surveillance.

To summarise the report, here are the three key requirements for fund management companies to comply with the rules:

• Use automated systems in your market surveillance processes to analyse large volumes of data and detect suspicious activity quickly and efficiently.
• Manual monitoring is also needed, meaning that you should have procedures for the manual handling of transactions and order analysis.
• You should design surveillance systems and procedures based on factors such as the number of orders and trades handled, the financial instruments and markets covered, order size and trading frequencies, and the type and size of your business.

What is the monitoring requirement for fund management companies?

The requirement is continuous monitoring of all orders and trades, and the primary focus for fund management companies should be to detect suspicious market manipulation, particularly during sensitive and critical periods, such as:

• Auctions (opening, closing, intra-day).
• Month-, quarter-, and year-end for reconciliation periods.
• Valuation intervals for new share issues.
• Acquisitions and other situations relevant to net asset value (NAV) valuation of funds.

The second focus area is insider trading, as there is often a lack of incentive for personal financial gain.

In conclusion

The Market Abuse Regulation is a set of rules that aim to maintain the transparency and integrity of the European financial markets.

Fund management companies are not exempt from complying with these regulations. They must establish effective systems and processes to detect, prevent, and report suspicious market abuse.

By complying with the Market Abuse Regulation, fund management companies can protect investors and enhance market transparency while keeping up to date with the development of financial markets in the European sector.