MAR 1.11 The scope of the market abuse regime
PRESCRIBED MARKETS AND QUALIFYING INVESTMENTS
Section 118(1) of the Act defines market abuse as behaviour which amongst other things: "occurs in relation to qualifying investments traded on a market to which this section applies"(See MAR 1 Annex 4 (Frequently asked questions))3
Section 118(3) allows the Treasury to prescribe markets and qualifying investments. This is the purpose of the Prescribed Markets and Qualifying Investments Order. This Order, when read in conjunction with the Act, makes certain kinds of investment "traded on" prescribed markets qualifying investments. The Treasury has prescribed all markets established under the rules of a UK RIE and the market known as OFEX as markets to which section 118 applies. The prescribed markets, as at 30 June 2003, are:
- (1)
the markets established under the rules of the following (the UK RIEs):
- (2)
In the majority of cases, there will be no dispute that an investment is "traded on" a prescribed market. However, in a small number of cases, for example, where an investment has traded in the past but not recently, and where an investment has not yet started trading, the answer may be less obvious. To avoid any doubt, the following investments would be "traded on" a prescribed market:
- (1)
investments which have not yet traded subject to the rules of a prescribed market from the point they start trading subject to the rules of a prescribed market (including the first trade);
- (2)
investments which are currently trading subject to the rules of a prescribed market; and
- (3)
investments which have traded in the past and can still be traded subject to the rules of a prescribed market.
The fact that behaviour has occurred in relation to an investment "traded on" a prescribed market is a necessary condition for market abuse to have occurred but it is not a sufficient condition. In addition, the behaviour must, among other things, satisfy one or more of the three conditions identified in section 118(2). It is difficult to see how these tests could be satisfied where there is no ongoing market on the prescribed market in the qualifying investment. If there is no ongoing market for a qualifying investment on a prescribed market, market participants are unlikely to rely on the prescribed market for price discovery or price formation. Equally, any trading in such a qualifying investment that is not associated with the prescribed market is unlikely to damage confidence in the prescribed market. The question of whether there is an ongoing market will depend on a number of factors, including how recently and in what volumes the qualifying investment has traded. The importance of these factors is likely to vary from market to market.
An example shows how this guidance might be applied. An investment has not traded for a long time or only in insignificant volumes but it can still be traded subject to the rules of a prescribed market. The investment will be "traded on" a prescribed market for the purposes of the regime (MAR 1.11.3 G). There will probably be no ongoing market in this investment since it has not traded for a long time or only in insignificant volumes. For that reason, behaviour in this investment is unlikely to amount to market abuse (MAR 1.11.4 G).
BEHAVIOUR OCCURRING IN RELATION TO QUALIFYINGINVESTMENTS
Section 118(1)(a) of the Act requires that, in order to amount to market abuse, behaviour must occur in relation to qualifying investments traded on a market to which the section applies. According to section 118(6) of the Act:"the behaviour which is to be regarded as occurring in relation to qualifying investments includes behaviour which:
The definition of behaviour in relation to a qualifying investment in section 118(6) is not exhaustive. However, there must be a clear relationship between the behaviour and a qualifying investment for the behaviour to be regarded as occurring in relation to a qualifying investment. Further, where behaviour is engaged in for the purpose of abuse in relation to a qualifying investment, it may be regarded as having occurred in relation to a qualifying investment even though the behaviour is not in a qualifying investment or relevant product (see MAR 1.11.8 E).
The statutory definition of behaviour which occurs in relation to qualifying investments set out at MAR 1.11.6 E includes behaviour in relation to other investments which are not themselves qualifying investments, since such behaviour can have a damaging effect on confidence in prescribed markets and qualifying investments. These related investments are referred to in this Code as relevant products.
Behaviour in the following relevant products is caught by section 118(6) of the Act:
- (1)
anything that is the subject matter of a qualifying investment;
- (2)
anything whose price is expressed by reference to the price of a qualifying investment;
- (3)
anything whose price is expressed by reference to the value of a qualifying investment;
- (4)
anything whose value is expressed by reference to the price of a qualifying investment;
- (5)
anything whose value is expressed by reference to the value of a qualifying investment;
- (6)
investments (whether qualifying or not) whose subject matter is a qualifying investment.
Something will be the subject matter of an investment or a qualifying investment where there is a clear (for example, contractual, documented) relationship between the two: for example, the subject matter specified in the contract specification of an exchange-traded investment. Contract specifications for exchange-traded investments which are physically settled will specify the deliverable product under the contract. Contract specifications for exchange-traded instruments which are cash-settled will specify the subject matter of the contract by reference to which the settlement price is to be calculated. In relation to OTC investments, the subject matter of the investment will be specified in the accompanying contractual documentation. The following are examples of the application of the element of subject matter:
- (1)
the subject matter of the gilt futures contract traded on LIFFE (which is a qualifying investment) is those gilts which are deliverable under the terms of the contract (which are investments). The gilts are therefore relevant products;
- (2)
the subject matter of the FTSE Eurotop 100 index option traded on LIFFE (which is a qualifying investment) is all the individual shares which constitute the index (which are investments). The shares are all therefore relevant products;
- (3)
the subject matter of an OTC option on a basket of UK shares (which is an investment) traded on a prescribed market is qualifying investments and the OTC option is therefore a relevant product.
The following are examples of the price and or value relationship between a qualifying investment and a relevant product:
- (1)
the value of a spread bet in relation to a basket of UK shares traded on a prescribed market is expressed by reference to the price of the shares (which are qualifying investments) and the spread bet is therefore a relevant product;
- (2)
the price of an OTC contract in relation to Brent crude is expressed by reference to the price of the Brent crude futures contract traded on the IPE (which is a qualifying investment) and the OTC contract is therefore a relevant product;
- (3)
the value of a total return swap in relation to a UK share traded on a prescribed market is expressed by reference to the value (that is the price and any dividend) of the share (which is a qualifying investment) and the total return swap is therefore a relevant product.