The CISE alternative to MAR
Thursday, 03 Nov 2016
The EU’s Market Abuse Regulation (MAR) came into effect from 3 July 2016 in a bid to harmonise regulation and therefore address concerns of market distortion. MAR has put in place a raft of obligations in relation to inside information, insider dealing and market abuse for securities admitted to trading on any facility in the EU.
However, these are not only burdensome and costly for issuers but because they apply equally to all types of securities, they are actually disproportionately onerous for some products such as High Yield Bonds (HYBs). There is even an admission within MAR that the requirements regarding disclosure of inside information and insider lists are an excessive burden for certain issuers.
As such, issuers who would have previously listed products on EU markets are now increasingly seeking out non-EU alternatives, such as the Channel Islands Securities Exchange (CISE). We are based in the European time zone but outside of the EU and therefore MAR does not apply to securities listed on our Exchange. We have maintained our robust market abuse rules which are applied proportionately to the type of listed product.
This position means that we have seen an increasing number of enquiries from issuers seeking a solution to MAR. On 5 August 2016 IDH Finance plc (MyDentist) became the first HYB issuer admitted to our Official List for several years and a number of others have since followed.
The previously existing Market Abuse Directive (MAD) was repealed and replaced by MAR in all EU Member States from 3 July 2016. MAR was conceived in response to concerns of market distortion arising as a result of EU Member States having different sets of rules and regulations and therefore it aims to harmonise regulation across the bloc.
The regulation is supplemented by various delegated acts and guidance from the European Securities and Markets Authority (ESMA) which set out the framework for compliance, including entities established both within and outside of the EU.
MAR applies to all financial instruments admitted to trading in the EU
MAR applies to all financial instruments admitted to trading on a Regulated Market (RM), Multilateral Trading Facility (MTF) or Organised Trading Facility (OTF) based in the EU. MAR also covers financial instruments not listed on one of those facilities but where its price or value depends on, or has an effect on, the price or value of another financial instrument which is listed on an RM, MTF or OTF in the EU.
Where it applies, MAR puts in place a raft of obligations in respect of inside information, insider dealing, market abuse and other related areas but with a particular focus on: the disclosure of inside information; insider lists; dealing in securities by Persons Discharging Managerial Responsibilities (PDMRs), closely connected persons and employees; share buy-backs, including price stabilisation; and market soundings.
Overly onerous for HYBs
MAR’s obligations are burdensome and as such, impose an added cost of compliance for issuers. There is great concern around the disclosure of inside information and the requirements for companies to maintain real-time insider lists containing the details of anyone with access to non-public information.
In fact, there is even an admission within MAR that “the requirement to disclose inside information can be burdensome for small and medium-sized enterprises…given the costs of monitoring information in their possession and seeking legal advice about whether and when information needs to be disclosed.” It suggests that ESMA should be able to issue guidelines which assist these issuers in complying with the obligation to disclose without compromising investor protection.
MAR also says that “the requirement to keep and constantly update insider lists imposes administrative burdens specifically on issuers on SME growth markets.” It actually exempts them from the requirement to have them kept constantly updated and only requires such issuers to provide an insider list to the competent authorities on request.
Given these admissions of the overly burdensome nature of MAR, it is perhaps surprising then that there are not similar provisions applying proportionality for other types of products. For instance, there is no equivalent exemption for HYBs which, while traditionally the preserve of large corporate paper issuers, are increasingly being issued by more moderately sized companies and in any case, are held long term by professional investors.
MAR has been designed with the equity market in mind.
Indeed, MAR has been conceived to protect the integrity of trading and was designed with the equity market in mind. In the equity market there are larger numbers and volumes of transactions and encompassing retail investors who need greater protection than the sophisticated investors who hold HYBs which are infrequently traded. For example, data from July this year for the London Stock Exchange’s Professional Securities Market shows that only 48 of the 501 debt securities listed actually traded. Not only were less than 10% traded during the period but of those, 10 only traded once and the highest number of trades by one security was 19.
This demonstrates the difference in nature between the debt and equity markets and as such, why regulations designed to tackle concerns around the trading of securities with retail investors can be overly onerous for issuers of HYBs.
For example, MAR’s provision on market soundings introduces the concept of a safe harbour from unlawfully disclosing inside information but some issuers of HYBs believe that it not only drives up the administration and therefore cost of gauging the interest in a transaction but it is excessive given the nature of their investor base.
In addition, MAR not only allows for legal entities to face punishments, such as fines but it also places liability on directors for market abuses, which now qualify as criminal offences and with penalties including imprisonment for the most serious. While not unreasonable in themselves, it does raise the prospect of directors facing sanction for behaviours which constitute breaching regulations that are either unclear and/or overly onerous in certain cases, such as for HYBs.
The CISE is based in the European time zone but outside of the EU and therefore MAR does not apply to a security listed on our Exchange, unless it is also traded on a RM, MTF or OTF in the EU or where its price or value depends on, or has an effect on, the price or value of another financial instrument which is listed on an RM, MTF or OTF in the EU.
We provide a fully regulated marketplace which offers continuity because we have maintained our market abuse rules, which are already sufficiently robust. For example, there is an obligation on issuers to disclose information which might reasonably be expected materially to affect market activity and the price of its securities and to avoid the establishment of a false market; our Members are bound by a Code of Conduct which includes rules around forbidden market practices, such as the creation of false markets, false trading, price fixing, false or misleading information and insider dealing; and we place obligations on the brokers trading securities on the Exchange, regarding quotations, transaction reporting, record keeping, price stabilisation and short selling.
However, we also ensure that these are applied proportionately to address the risks of each different type of listed product. For example, our Model Code for Securities Transactions PDMRs applies to the equities of trading companies and investment vehicles but does not apply to securities listed under Chapter 8 of our Listing Rules for specialist debt securities. We also have a pragmatic continuing obligations regime that is easy to navigate and is clear in what information is required to be announced to the market and when.
We have maintained our robust market abuse rules which are applied proportionately
It is this approach, combined with international approvals such as being an Affiliate Member of the International Organisation of Securities Commissions (IOSCO), an Affiliate Member of the World Federation of Exchanges (WFE) and deemed a ‘recognised stock exchange’ by the UK tax authority, HMRC, which means that over the years we have developed expertise in listing specialist debt. Today there are more than 1,500 specialist debt securities listed on the CISE. We have previously listed HYBs but IDH Finance PLC (MyDentist) became the first for several years when it was admitted to the Official List on 5 August 2016 and others have followed since, such as Schoeller Allibert Group B.V.
This has prompted significant interest from other issuers and advisers in either bringing new issues to us or migrating currently listed securities from EU exchanges. There is recognition in the marketplace that we not only offer a more proportionate approach to the application of market abuse rules but that we can provide a familiar product and service.
For example, like other exchanges specialising in HYBs, we do not require standalone guarantor accounts for each guarantor, if they are all part of the same group, and group consolidated accounts are acceptable. We are also aware that many high yield bond issuers have certain requirements in terms of the time to process listing applications and we believe that, as long as they and the listing sponsor work in conjunction with our responsive listings team, then we will be able to meet their expectations.
The CISE has a business established in 1998 and since that time we have grown a reputation not just for listing the equity of trading companies and investment vehicles but also specialist debt securities. An important factor in this success has been having market abuse rules which are robust and applied proportionately to the types of listed products.
MAR does not make that distinction and therefore it is proving excessively onerous for issuers of products such as HYBs which are held by sophisticated investors over the long term. As such, there is now a definite trend towards listing HYBs on the CISE, where issuers are not required to comply with MAR but instead follow a regime which is rigorous and proportionate according to the type of listed product.
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