Market Abuse Directive II or also known as Market Abuse Regulation is coming into force on 03.07.2016. All trading activity and participants are directly or indirectly affected by the new “big brother” rules.

The idea of this new regulation is to increase market integrity and thus investors’ trust in European financial markets. European Securities and Markets Authority (ESMA) is shooting the MAR bullet at the markets with the aim to reduce insider dealing and market manipulation cases in the markets.

ESMA has been very generous in terms of what needs to be in scope of automatic surveillance.

1. From 03.07.2016 not only confirmed misconduct in financial markets but also an attempt to manipulate or act on insider information will be subject of punishment.

2. Not only Regulated Markets but also all OTC trading as well as Cross Market/Cross Product Manipulations between OTC and Regulated Markets are part of automatic surveillance scope.

3. ESMA states in the Final Report that the specific example scenarios provided in the relevant consultation papers is only a part of possible market misconduct patterns. In other words, ESMA has provided only a non-exclusive list of market misconduct indicators.

European Market Players are running out of time to meet the 03.07. deadline. Will they meet the new MAR requirements? If yes, to what extent? What happens if they fail to be compliant? How strict will ESMA act in terms of financial fines and punishments? Will it be as generous as the scope of the new regulation?…These are some of the questions which are preparing decent amount of stress and fear in many compliance departments at the moment.

Out of our observation of the ongoing processes and actions taken by the different European banks and financial institutions it seems that there will probably be hardly any market player which will be able to prove it has full MAR coverage and full automatic MAR surveillance by the deadline.

We expect that there will be very little share (under 10%) of those who have correctly identified for them most relevant MAR scenarios and who have succesfully implemented automatic tools to ensure required level surveillance.

Thus, a great bulk of EU market players will still be not fully compliant with the ESMA’s new regulations on 03.07.2016. The times that will come after July of this year will definitely be a great challenge for those non-compliant ones. It will also be very interesting to see how ESMA reacts to these gaps.

As for the reasons of this poor level of preparation, there are multiple of those. Some examples would be: 1. ESMA failing to determine exclusive list of all scenarios and all ingredients as well as details which would be easy to follow and higher level of clarity in scope 2. Banks and FIs started late or very late to worry about the July deadline, maybe partialy because they expected ESMA to define more details and clearer scope. 3. Vendors which were in a position to provide automatic surveillance tools saw this delay in the demand of automatic coverage and this resulted in the late start of developments of such tools. 4. OTC trading is still not the subject of public disclosure. This means, the OTC market volumes are unknown and will stay so till MiFiR comes into force. Without having a clear idea on OTC market volumes, it is very hard if not impossible to automatically detect market misconduct.

Having said that, we do expect that most of the becoming MAR compliant will only happen after July 2016… They say this summer will be very hot..

Thanks,

Gio Kevanishvili Consultancy