Integrity, Transparency and Efficiency

Capital markets are an important source of financing in an economy; providing companies with alternative sources of finance to traditional bank borrowings, while creating an opportunity for the public to invest in companies and diversify their investment portfolio. Capital markets also provide a venue of liquidity as securities are freely tradeable.

The Market Abuse Regulation (MAR), which came into force across the European Union member states as from July 2016, is based on three pillars – Integrity, Efficiency and Transparency. These characteristics are important and have been the focal point of this regulation.

The scope of MAR extends to any financial instrument traded on both the regulated market and other trading facilities, including multilateral trading facilities (MTF). Taking the local context, this regulation applies to all securities listed or traded on the regulated market (including the Official List which is regulated by the MFSA) and Prospects (an MTF operated by the Malta Stock Exchange). MAR has some exemptions in terms of reporting and obligations that apply to securities listed or traded on SME growth markets, however, in Malta, there seems to be none[1].

Market abuse encompasses unlawful behavior in the financial markets which is understood to include i) disclosure of Inside information; ii) Insider Trading; and iii) Market Manipulation. These three aspects will be the basis for today’s article.

Inside Information

Inside Information is defined as information which is of a ‘precise nature’, ‘not made public’ and ‘relating, directly or indirectly’ to the company’s securities and which ‘if it were made public, would be likely to have a significant effect on the prices’ of the securities in question.  As such, the unlawful disclosure of inside information arises where a person who is in possession of such information discloses it to another person (an exemption to this applies in instances where such disclosure is made in the normal exercise of an employment, a profession or duties).

In order to address this concern, MAR requires that each company maintains a register of insiders, namely the persons within the company, and outside, who are privy to inside information. There are two lists which an issuer may draw up – the permanent list of insiders and the temporary list. The former includes those people who are constantly susceptible of being in receipt of Inside Information because of their role, function or position within the issuer, such as the Chief Executive Officer, or the Chief Financial Officer. In the temporary list, the persons listed, as the name implies, would include those who are not always privy to inside information, but are involved with the issuer on deal-specific or project-specific transactions. These could include advisers, bankers, accountants, auditors, consultants and/or other employees. A register should be kept updated with the date when the persons were in receipt of inside information and when the information ceases to be inside information (following which they can be struck-off the list).

Insider Trading

Insider Trading would arise when a person who possesses inside information uses such information for the acquisition or disposal of the securities, either for his/her own account or for the account of a third party, directly or indirectly.

In promoting transparency, the regulation also expects issuers to make public any inside information in order to avoid insider trading and ensure that investors are not misled. It is only when the disclosure of the inside information would be to the detriment of the issuer or when the disclosure of the inside information could mislead the public that MAR allows exemptions from disclosure of the said information. Such legitimate reasons may include, amongst others, any ongoing commercial negotiations by the issuer that give rise to price-sensitive commercial information that cannot be made public since it may hinder the same negotiations, or where the decisions taken or contracts signed are subject to attainment of approval from another body of the issuer and as such would not yet be confirmed.

[1] MFSA Circular dated 5 July 2019

Market Manipulation

The third prohibition of MAR relates to market manipulation. Market Manipulation activities include actions taken that (are likely to) give misleading signals in relation to the supply, demand or price of a security, or which result in pushing the price of a security to abnormal or artificial levels. Market manipulation can occur through a number of activities, such as the dissemination of misleading information through media and/or the internet, or through the placement of orders or execution of transactions that are likely to mislead investors who may act on the basis of the price of the security on the stock market, and the creation of false or misleading signals of supply or demand or the price of the security, amongst others.

Integrity

The Market Abuse Regulation aims at preserving the integrity of the capital market. If there are cases where there is Insider Trading, the integrity of a capital market gets tarnished and as such, the national competent authorities and operators of the markets are expected to ensure that issuers are made aware of the requirements and obligations vis-à-vis ensuring that there is no insider trading, particularly by those on the insiders’ list and PDMRs (or persons discharging managerial responsibilities) and their close associates.

In fact, whenever PDMRs (including members of the administrative, management or supervisory body of the issuer and/or senior executives who regularly have access to inside information directly or indirectly and who have the power to take managerial decisions affecting the future developments and prospects of the business) and their close associates (including partners, spouses, dependent and other family members who share the same dwelling and business partners, amongst others) trade in the securities of the company to which they are associated to, a notification has to be sent to the issuer and the national competent authority (in Malta this is the MFSA) of such trades. The specific form which is available from the MFSA includes details of the transaction (whether it is a disposal or acquisition of the security, the quantity and the price, amongst others). Such information has to be sent by no later than three business days from the execution of the transaction and has to be published on the issuer’s website. The MFSA also publishes such information on a collective basis for all issuers, however, it is not obliged to do so – the obligation has been shifted onto each of the issuers.

Integrity, Transparency and Efficiency

Investor confidence is a key factor for an efficient capital market. If investors are not willing to invest because they lack the confidence in the integrity of the market, then the market will no longer be attractive to issuers for them to diversify their financing options (particularly with the issue of debt instruments such as bonds) or to grow their business by allowing new equity investors via an initial public offering.

“Reasonable investors base their investment decisions on information already available to them” – MAR preamble. As such, it is important for investors to have information made available for them to take on calculated risks. Information and transparency become key in improving confidence in the market. Last but not least, equipped with confidence and information, the investor public will make the market more efficient and improve its liquidity. An investor who has no information forthcoming from an issuer will not have any basis for trading in or out of a particular investment. This is why company announcements made by issuers should include all information necessary in terms of both MAR and the rules of the market that they are listed or traded on.

The Official List and Prospects

MAR applies to both the Official List (main market) and Prospects (the local MTF). It is encouraging to see an increasingly number of companies taking a more active approach and making the necessary detailed disclosures as and when necessary or required.

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