Implications of new EU regulation to curb market abuse
Nironjan Roy | Published:
August 22, 2016 20:26:07
October 21, 2017 08:12:25
During the last 50 years, innumerable rules and regulations have been enacted in the developed world but illegal means of earning money could not be prevented. Once financial crime was limited to million dollars but now it has increased to billion dollars. Whenever any new rule and regulation are created, attempts are under way to either abuse it or find loopholes for manipulation. The situation is such that there seems to be a tacit competition between the regulator and the market participants as the former is busy with making new law while the latter is busy with breaking it.
The European Union (EU) has enacted a new rule named, Market Abusing Regulation (MAR) which came into force since July 03 of this year.
This new regulation will replace the Market Abusing Directives (MAD). Applicability of all European rules is always restricted to its member-countries but it has extraterritorial impact to some extent and MAR is not out of that unique feature. Trading of shares and bonds, i.e., equity and fixed income securities and derivatives will come under the purview of this new regulation. MAR governs much wider range of financial instruments than that of previous MAD because MAD was applicable for financial instruments listed only with the stock exchanges of EU member- countries whereas new regulation MAR applies to financial instruments traded in the bourses of both EU member-countries and non-EU countries.
Even the instrument whose value has impact in the instrument traded in other country's bourses will also come under the purview of this new regulation. As for example, OTC (Over the Counter) derivative linked with the instrument enlisted with New York Stock Exchange or OTC Credit Default Swap between EU and non-EU exchanges will fall under the applicability of this new regulation. In fact, financial securities traded anywhere in the world may be subject to MAR if any of its instruments is listed in the exchange of any European country. However, spot foreign exchange transaction and sport commodity trading have been kept out of MAR and therefore, this regulation will not apply to trading of these two instruments.
OFFENCE AND PUNISHMENT UNDER MAR: MAR specifically targets three kinds of financial offences, which commonly take place in financial market. Insider trading, unlawful disclosure of confidential information, particularly non-public information and most importantly, market manipulation will be governed by this new regulation. The scope of inside trading and unlawful disclosure is very limited because only those who are directly involved with the operation of the issuer company, broker-dealer company and the operation of bourses may come to the application to this new regulation. However, the impact of market manipulation is very wide and far-reaching. The MAR has further widened its scope and applicability by bringing the attempt of market manipulation under its jurisdiction. So if anybody attempts to manipulate capital market or any action which seems to be market manipulative, that attempt must be subjected to this new regulation.
At the same time, periphery of market manipulation is so wide that any person involved in placing investment order, executing those orders and finally investing in equity and fixed income securities may be impacted by this regulation. Consequence of violation of MAR is very severe because both the individual and the institution as a whole can be penalised under this regulation. In addition to public censure and cancellation of registration, there is a provision for imposing substantial fines to the violators. MAR allows the regulator to impose fine up to EUR five million on the individual and 15 million Euro on the institution, if found guilty. Besides, there is a provision for initiating criminal proceedings against those who will fail to comply with this regulation,
IMPACT ON BANGLADESHI INVESTORS: This regulation will mostly impact the financial institutions which have established operation in Europe and the international bourses where stocks and securities with multiple listings are traded. Even the companies whose stocks and bonds are enlisted with any bourse of European countries will also be governed by this regulation. In this context, this regulation is not supposed to have any direct impact on our country's banks, financial institutions and business enterprises which are not enlisted with European bourses. However, indirect impact cannot be ruled out because our banks or financial institutions might have investment in stock, bond and derivatives which are listed with the exchange of European countries.
Even Bangladesh Bank (BB) might have investment in European equities and fixed income securities as a part of managing its reserve. It is not unlikely that some businessmen of our country may have investment in the capital market of European countries. So the policymakers of our central bank and those responsible for international division of our banks and financial institutions should be familiar with this new regulation. Especially, the investment firms or brokerage houses through which investment will be carried out must be well compliant. Apart from this, expatriate Bangladeshis living in European countries might have been badly impacted because there is every possibility that they may have active investment portfolio in European stocks and debentures. It is true that those who become citizens of any European country do not require any help and cooperation from the Bangladesh government because they will be taken care of by the respective countries.
However, investment of those who are living in Europe as Bangladeshis under different capacities other than citizenship will come under the purview of this new regulation. If expatriate Bangladeshi investors are not familiar with this new regulation and consequence of violating thereof, they may have to bear dire consequences in the event their investment is somehow involved with insider trading or market manipulation. Our embassies in European countries can play an important role by circulating the important key features of this regulation among expatriate Bangladeshi people living in Europe and make them fully aware of MAR.
Now the world has turned into a global village and international trade and finance have been extensively integrated. The financial professionals should keep them abreast with the latest changes taking place in the global financial industry. MAR is the latest change brought about in the financial regulations in Europe. Our concerned financial professionals and central bankers should get familiar with this regulation.
The writer is a banker based in Toronto, Canada.