MFSA Publishes Circular on Market Abuse Regulation

Maltese Regulator Publishes Circular on EU MAR

MFSA - the Malta Financial Services Authority - has published a circular on the Market Abuse Regulation (MAR). The circular highlights the obligations of regulated entities to prevent and detect market abuse, while providing 'recommendations of what are considered to be the best practices [...] to seek to adhere to their legal obligations under MAR.'

In particular the regulator focuses on market operators and investment firms that operate a trading venue, but there is also attention given to 'every person that professionally arranges or executes transactions in financial instruments. The following article covers some key take aways from this circular, and gives some further information on how these entities might be impacted.

General Obligation to Maintain Effective Arrangements, Systems and Procedures

The circular begins with an overview of the broad obligations of regulated Maltese entities with regards to market abuse. The regulator emphasises that market operators, investment firms and individuals who professionally engage in trading 'must establish and maintain effective arrangements, systems and procedures to detect and notify suspicious orders and transactions'. It follows this with an assertion that, should an entity detect suspicious trading which 'could constitute insider dealing, market manipulation, or attempted insider dealing or market manipulation', that entity is obliged to notify the MFSA 'without delay'.

The regulator continues that any arrangements, systems and procedures in place must be:

1. Appropriate and proportionate in relation to the scale, size and nature of their business activity;
2. Regularly assessed, at least through an annually conducted audit and internal review, and updated when necessary;
3. Clearly documented in writing, including any changes or updates to them, for the purposes of complying with this Regulation, and that the documented information is maintained for a period of five years.

The systems put in place must also be able to perform the following functions:

1. Allow for the analysis, individually and comparatively, of each and every transaction executed and order placed, modified, cancelled or rejected in the systems of the trading venue and, in the case of persons professionally arranging or executing transactions, also outside a trading venue;
2. Produce alerts indicating activities requiring further analysis for the purposes of detecting potential insider dealing or market manipulation or attempted insider dealing or market manipulation;
3. Cover the full range of trading activities undertaken by the persons concerned.

Best Practices

Along with this general guidance, the circular provides a number of more specific best practices to be followed as a means of ensuring compliance with MAR.

One of these best practices is the lowering of the thresholds of the 'reasonable suspicion test'. The regulator expresses an opinion that, despite the recent improvement in the submission of STORs, there is still 'a high-degree of under-reporting of suspicious orders and transactions'.

The reason they give for this under-reporting is that 'the thresholds of the reasonable suspicion test are commonly too stringent resulting in each and every suspicion being discarded on the basis of a high threshold being set for the reasonable suspicion test'. Put simply, it seems that MFSA is of the opinion that, even in instances where a regulated firm has an appropriate trade surveillance system in place, the parameterised tolerance thresholds have been set such that the vast majority of suspicious trades are not flagged as suspicious, thereby meaning they go un-reported.

The appropriate solution to this problem, as stated by the MFSA, is re-contextualise the reporting of suspicious trades. They argue that a reporting firm does not need to be 100% certain of abusive trading in order to submit an STOR; rather, it should be regarded as a way of flagging potential or suspected market abuse. They write 'a STOR should not be interpreted as being a notification of market abusive behaviour but rather, as the name implies, a notification of suspected market abuse. In other words, the submission of a STOR does not imply market abuse in itself.'

This is where the benefit of a trade surveillance system like TZ makes itself known. With the ability to set parameters dynamically according to various criteria such as market volatility and instrument liquidity, users can establish a more nuanced approach to the detection of potentially suspicious trading.

As well as this the MFSA lists a number of other best practices, including streamlining the analysis of suspicious trades and implementing proper risk management.

How to Stay Compliant

To stay compliant with these stringent new approaches to market abuse, a robust trade surveillance tool is necessary. If you would like to learn more about how our trade surveillance software TZ could help your firm, fill out a contact form or book a free consultation.