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FMLC MAR Consultation: Inside Information & Spot FX
FMLC: ESMA MAR Consultation – Insider Dealing & Spot FX
2nd December 2019
Last week the Financial Markets Law Committee (FMLC) published their response to the European Securities & Markets Authority’s (ESMA) consultation from October 2019. In their response, the FMLC argues that the definition of “inside information” should not be amended and also considers whether spot FX contracts should be brought within the scope of the Markets Abuse Regulation (MAR), implemented in 2016, that repealed and replaced the previous Market Abuse Directive (MAD).
The FMLC are a Committee whose role is to identify issues of legal uncertainty or misunderstanding, present and future, in the framework of the wholesale financial markets that might give rise to material risks. In addition to identifying such issues, the FMLC also consider how such issues should be addressed.
ESMA’s October Consultation proposed to amend the definition of inside information. In this regard, the FMLC believe that should this be amended in the near future it “is likely to be a cause for alarm to market participants. The current definition is not perfect and the expansion by MAR of the definition which had existed in MAD had several knock-on effects for market participants. In the U.K., for example, the scope of the offence of dealing in inside information changed considerably”
This was because the implementation of MAD within the UK’s Financial Services and Markets Act incorporated a ‘general defence’ that allowed an insider to make a trade as long as they has exercised due care or diligence so as not to make use of inside information. As the FMLC inform, “that section (Section 118) was out of line with the European Court of Justice decision in the matter of Specter Photo Group v CBFA  C-45/08 where a person in possession of inside information who trades in the relevant security is presumptively in breach of the prohibition. It is the ECJ decision that is now reflected in MAR and the defence in section 118 has been abrogated accordingly.”
Despite these initial differences upon implementation, the FMLC advise that “the market has, however, adapted to the definition and adopted appropriate practices.” Yet, their letter urges ESMA and the European Commission to “refrain from tweaking the definition at this stage”, since an important component of legal certainty is both stability and predictability. The FMLC believes that an amendment to the definition of inside information in such a short time since the last set of amendments will “increase legal uncertainty and cause market disruption”.
And in relation to Spot FX, the FMLC write in response to ESMA:
“The current exclusion of spot FX contracts reflects the fact that such contracts are not financial instruments, the delineation between spot FX and FX derivatives that are financial instruments having been harmonised by Directive 2014/65/EU on markets in financial instruments ("MiFID II").”
The FMLC continues, “Spot FX contracts are characteristically contracts entered into for commercial purposes—for example, as a means of payment—rather than for investment purposes. Investment is, however, a key feature of the definition of inside information in MAR.”
“In addition, a host of interrelated obligations— including confidentiality, prohibition from entering into transactions, prevention and detection and issuer disclosure—flow from that definition. The Consultation itself highlights the technical difficulties in applying the current MAR definition of inside information to spot FX: in paragraph 20, ESMA asks who could be considered as the issuer for spot FX contracts. In practice, there would be none. In Question 2, ESMA states that structural changes would be necessary to apply MAR to spot FX contracts. The FMLC agrees that, spot FX transactions being ubiquitous, the regime may require broad exemptions and safe harbours to be workable, which raises further complexities around who and what might be exempted.”
The FMLC believe that market participants are likely to “face difficulties” when trying to identify what is relevant as inside information in relation to spot FX contracts and in taking into account relevant considerations such as what factors to take into account when “determining whether information is precise, relates to the contract in question and would be likely to have a significant effect on price.”
The FMLC believe “these challenges arise in respect of other products outside the traditional issuer-securities markets—for instance, commodity derivatives, for which there is a specific insider dealing regime under MAR—but may be greater for spot FX, given that spot FX would be otherwise outside the scope of E.U. regulation (whereas other products are within the scope of MiFID II) and the commercial nature of spot FX contracts” as was highlighted earlier in the FMLC’s letter.
The FMLC inform ESMA that stakeholders have highlighted to them that aspects of dealing with confidential information, that are relevant to FX trading, including information relating to pending client orders, are already comprehensively covered by the FX Global Code, (which the FCA have already formally recognised as an Industry Code of Conduct meaning that those within the UK are therefore already obliged to be compliant with).
The FMLC therefore believe that is the EU should choose to regulate this area, it might therefore be important to review the application of the FX Global Code, which has been adopted by market participants in several jurisdictions.
In fact, the FMLC is therefore concerned that “A new and specific E.U. regime, based on broadly defined conduct, may disrupt the process of bedding-down the FX Global Code and could even lead to the fragmentation of global FX and securities markets.”
To read both ESMA’s Consultation and the FMLC’s Letter in full, see the following:
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