Managers' carbon transactions under the Market Abuse Regulation
- Category: MAD/MAR
The general rule introduced by the Market Abuse Regulation (MAR) with respect to persons discharging managerial responsibilities (PDMR) is that such persons, as well as persons closely associated with them, must notify the issuer or the emission allowance market participant and the competent authority of the Member State where the issuer or emission allowance market participant is registered:
(a) in respect of issuers, of every transaction conducted on their own account relating to the shares or debt instruments of that issuer or to derivatives or other financial instruments linked thereto;
(b) in respect of emission allowance market participants, of every transaction conducted on their own account relating to emission allowances, to auction products based thereon or to derivatives relating thereto.
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(a) have requested or approved admission of their financial instruments to trading on a regulated market; or
(b) in the case of an instrument only traded on an MTF or an OTF, have approved trading of their financial instruments on an MTF or an OTF or have requested admission to trading of their financial instruments on an MTF.
It needs, however, be recalled, emission allowances are reclassified as financial instruments under the MiFID II Directive and thus also fall within the scope of the market abuse framework. Consequently, emission allowances are included by the MAR in the notifications system, originally designed by the MAD I.
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'person discharging managerial responsibilities' means a person within an issuer, an emission allowance market participant or auction platform, auctioneer and auction monitor, who is: (a) a member of the administrative, management or supervisory body of that entity; or (b) a senior executive who is not a member of the bodies referred to in point (a), who has regular access to inside information relating directly or indirectly to that entity and power to take managerial decisions affecting the future developments and business prospects of that entity. 'person closely associated' means: (a) a spouse, or a partner considered to be equivalent to a spouse in accordance with national law; (b) a dependent child, in accordance with national law; (c) a relative who has shared the same household for at least one year on the date of the transaction concerned; or (d) a legal person, trust or partnership, the managerial responsibilities of which are discharged by a person discharging managerial responsibilities or by a person referred to in point (a), (b) or (c), which is directly or indirectly controlled by such a person, which is set up for the benefit of such a person, or the economic interests of which are substantially equivalent to those of such a person. |
In effect, when compared with the first design of the managers' transactions notification system introduced by MAD I, MAR has expanded the scope of the notification requirement by:
1. generally extending the scope of the financial instruments covered to financial instruments admitted to trading, or for which a request has been made to trade on a regulated market and a MTF, and those traded on an OTF (however, notification requirement will only apply to those issuers that have requested or approved admission to trading/trading of their financial instruments on one of the venues),
2. the scope of instruments falling under the obligation explicitly covers both shares and debt instruments of the said issuer, derivatives or other financial instruments linked to them, and emission allowances, related auction products or related derivatives.
Moreover, the notification requirements apply not only to sales and purchases, but also to donations, for example.
The expanded transparency requirements led to a significant increase in the number of corresponding notifications, for example BaFin Annual Report 2018 mentions (p. 129) that in 2018 3,260 were received compared with 1,809 notifications obtained in 2015 – the last year before the MAR entered into force.
MAR also clearly imposes a notification obligation to persons discharging managerial responsibilities and closely associated persons within an emission allowances market participant (the scope of this term explained here), and such persons within an auction platform, an auctioneer or an auction monitor.
Notification timing
MAR in Article 19(2) requires the notifications of transactions made on account of persons discharging managerial responsibilities to be made promptly and no later than three business days after the date of the transaction. This timeframe is reduced in comparison with the earlier Commission Directive 2004/72/EC implementing Market Abuse Directive (where the respective deadline was 5 days). Moreover, the regulator has not agreed with the views arguing that the timing for notification should only start when there is effective knowledge of the transaction by the person discharging managerial responsibility or the closely associated person.
The only date relevant is, in the light of the express wording of Article 19(2) of the MAR, the date of the transaction.
The European Securities and Markets Authority (ESMA) underlined that this rule applies also with respect to gift, donation and inheritance (see, however, the remarks below as this stance sparked some controversy).
Moreover, as the date of the transaction is to be determined by applicable laws of the national state, I suppose there may occur particular situations, where - under the same factual circumstances - the date of the transaction will differ in divergent Member States' jurisdictions. Jurisdictional issues are further elaborated on below.
Notification threshold
This requirement applies once the total amount of transactions has reached the established threshold within a calendar year (generally EUR 5 000, but subject to certain level of discretion on national level - see below).
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ESMA's Questions and Answers on the Market Abuse Regulation, 26 October 2016, ESMA/2016/1520
Question 1 [last update 26 October 2016] For transactions carried out under Article 19(1) of Regulation (EU) No 596/2014 of the European Parliament and of the council (MAR) in a currency which is not Euro (EUR), which exchange rate should be used to determine if the threshold set forth in Article 19(8) MAR of EUR 5 000 has been crossed? Answer 1 If transactions are carried out in a currency which is not the EUR, the exchange rate to be used to determine if the threshold is reached is the official daily spot foreign exchange rate which is applicable at the end of the business day when the transaction is conducted. Where available, the daily euro foreign exchange reference rate published by the European Central Bank on its website should be used. |
MAR expressly states that the requirement mentioned applies "to any subsequent transaction once a total amount of EUR 5 000 has been reached within a calendar year". The threshold of EUR 5 000 is calculated by adding without netting all the above-mentioned transactions.
If transactions are carried out in a currency which is not the EUR, the exchange rate to be used to determine if the threshold is reached is the official daily spot foreign exchange rate which is applicable at the end of the business day when the transaction is conducted. Where available, the daily euro foreign exchange reference rate published by the European Central Bank on its website should be used.
Pursuant to MAR a Member State national financial authority may decide to increase the above threshold to EUR 20 000 (on such an occasion it informs ESMA of its decision and provides the justification for its decision, with specific reference to market conditions).
ESMA is obliged to publish on its website the list of applicable thresholds and the respective justifications.
It is acknowledged by ESMA the transactions executed by a person discharging managerial responsibilities or a closely associated person before the threshold is reached are not required to be notified to the relevant competent authority nor to the issuer or emission allowance market participant.
Complementary notifications
Under MAR the required notifications amount to a entire, complex "system" as, the above one notwithstanding, provisions also stipulate that:
- issuers and emission allowance market participants must notify the person discharging managerial responsibilities of their respective obligations in writing (issuers and emission allowance market participants must also draw up a list of all persons discharging managerial responsibilities and persons closely associated with them);
- persons discharging managerial responsibilities must notify the persons closely associated with them of their respective obligations in writing and must keep a copy of this notification.
Publication requirement
The issuer or emission allowance market participant are required to make public the information that is notified. Such publication must take place no later than three business days after the transaction.
Considering a person discharging managerial responsibilities has also been given three days to notify an issuer or emission allowance market participant, if the notification reaches the latter at the very end of the third business day after the transaction, it may be sometimes almost impossible to fulfil publication duties.
The only possible solution to this problem is to require - through internal company's procedures and agreements - the notifications to be made earlier than the maximum term set by MAR. The second term - for publication - is not negotiable, as it relates specifically to MAR level 1.
The publication must be made in a manner which "enables fast access to this information on a non-discriminatory basis".
The issuer or emission allowance market participant should use such media as may reasonably be relied upon for the effective dissemination of information to the public throughout the Union, and, where applicable, the officially appointed mechanism referred to in Article 21 of Directive 2004/109/EC should be used.
Alternatively, national law may provide that a competent authority may itself make public the information.
Format and template for notification and public disclosure
A notification of transactions must contain the following information (Article 18(3) of MAR):
(a) the name of the person;
(b) the reason for the notification;
(c) the name of the relevant issuer or emission allowance market participant;
(d) a description and the identifier of the financial instrument;
(e) the nature of the transaction(s) (e.g. acquisition or disposal), indicating whether it is linked to the exercise of share option programmes or to the specific examples indicated;
(f) the date and place of the transaction(s); and
(g) the price and volume of the transaction(s). In the case of a pledge whose terms provide for its value to change, this should be disclosed together with its value at the date of the pledge.
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The aforementioned list of items in Article 19(6) MAR is complete and not extendable with extra items, as the wording of this paragraph does not include any expression such as "shall include at least", which is used, for instance, in Article 18(3) of MAR defining the minimum content of the insider list.
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Template for notification and public disclosure - content specification
I. Details of the person discharging managerial responsibilities / person closely associated – including the name: for natural persons: the first name and the last name(s); for legal persons: full name including legal form as provided for in the register where it is incorporated, if applicable. II. Reason for the notification – including: a. Position/status: For persons discharging managerial responsibilities: the position occupied within the issuer, emission allowances market participant / auction platform / auctioneer / auction monitor should be indicated e.g. CEO, CFO; and for persons closely associated an indication that the notification concerns a person closely associated with a person discharging managerial responsibilities and the name and position of the relevant person discharging managerial responsibilities should be included. b. Initial notification/Amendment – including an indication that the notification is an initial notification or an amendment to prior notifications (in case of amendment, the explanation of the error that this notification is amending should be included). III. Details of the issuer, emission allowance market participant, auction platform, auctioneer or auction monitor – including IV. Details of the transaction(s): section to be repeated for: This section includes: a. Description of the financial instrument (type of instrument), and identification code as defined under MiFIR implementing text relating to transaction reporting (i.e. delegated acts adopted under Article 26 of Regulation (EU) No 600/2014); b. Nature of the transaction – using where applicable the type of transaction identified in the Commission Delegated Regulation adopted under Article 19(14) of MAR, specifying the types of transactions that would trigger the requirement of notification (and it should also be indicated whether the transaction is linked to the exercise of a share option programme); c. Price(s) and volume(s) - the standards set up for transaction reporting under MiFIR should be used. Where more than one transaction of the same nature on the same financial instrument or emission allowance are executed on the same day and on the same place of transaction, prices and volumes of these transactions shall be reported in this field, in the two columns form included in the template, inserting as many lines as needed; d. Aggregated information – as explained above; e. Date of the transaction - the standard data format to use is the one defined under MiFIR implementing text relating to transaction reporting; f. Place of the transaction - it should indicate the trading venue identification code as defined under MiFIR implementing texts or mention "outside a trading venue" if the transaction was not executed on a trading venue. |
Persons discharging managerial responsibilities and persons closely associated with them are required to use the template set out in the Annex to the Commission Implementing Regulation (EU) 2016/523 of 10 March 2016 laying down implementing technical standards with regard to the format and template for notification and public disclosure of managers' transactions in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council for the submission of the notifications and public disclosure of transactions (Article 2(1) of the said Regulation 2016/523) - see the template attached.
Single template
There is a single template the entirety of which will have to be publicly disclosed. ESMA's Final Report Draft technical standards on the Market Abuse Regulation of 28 September 2015 (ESMA/2015/1455) argues MAR Level 1 text does not envisage different sets of information to be given to competent authorities and issuers, on the one hand, and to the public, on the other (p. 67).
Pursuant to ESMA, the wording of Article 19(3) of MAR leaves no room for such a distinction: "the issuer or emission allowance market participant shall ensure that the information that is notified in accordance with paragraph 1 is made public promptly (...)".
Besides, the wording of the empowerment to ESMA in Article 19(5) refers to the same information to be notified to national competent authorities and issuers and to be published: "(...) ESMA shall develop draft implementing technical standards concerning the format and template in which the information referred to in paragraph 1 is to be notified and made public".
The template therefore does npot distinguish between section not to be published and section to be published, as the notification will have to be publicly disclosed in full.
The items of the template retain the information needed by the competent authorities, while at the same time being suitable for full publication.
Multiple transactions
The notifications to be received by the competent authorities and the issuers, the EAMPs or the auction entities and to be publicly disclosed should detail every transaction. However it is not expected that a separate notification is sent for each individual transaction.
To limit the burden, a PDMR or a closely associated person are able to send a single notification listing and detailing multiple transactions carried out, as long as the three-working day deadline foreseen in the second subparagraph of Article 19(2) of MAR, is complied with.
For this purpose the template for notification is designed in a way to allow, in case of multiple transactions conducted, the repetition of the section on the "Details of the transaction(s)" for:
(i) each type of instrument;
(ii) each type of transaction;
(iii) each date; and
(iv) each place where transactions have been conducted.
For example, if a PDMR in day 1 has bought a share of the company where he works, and on day 2 has bought a debt instrument of the same company, he can use the same notification with section 1, 2, and 3 of the template compiled once, and section 4 on the "Details of the transactions" repeated twice – one for the share and one for the debt instrument.
Aggregated form
Besides the information on each single transaction, the template allows for the presentation of the transactions also, though not only, in an aggregated form.
The aggregated information should indicate the volume and the volume-weighted average price of all the transactions meeting the following conditions:
(i) they are of the same nature; (ii) they are on the same financial instrument;
(iii) they have been carried out on the same trading day; and
(iv) they have been carried out on the same trading venue, or outside any trading venue.
The aggregated volume is a cumulative figure obtained adding the volume of each of the transactions taken into account for the aggregation.
Transactions of different nature, such as purchases and sales, should never be aggregated nor should be netted between themselves.
The fact that the transactions meeting these conditions are reported in an aggregated form does not affect the requirement to report the information regarding the same transactions also in a separate transaction-by-transaction way within the same notification.
A common situation could be that, for example, during a single trading day the same financial instruments are bought in multiple transactions by a PDMR: these transactions would also have to be reported in aggregated form under item 4(d) of the template "Aggregated information".
As already said, only transactions of the same type could be aggregated: for instance, lending transactions could be aggregated among them, but not netted with other types of transactions (e.g. borrowing transactions).
Corrections
In the event that a notification made and disclosed is required to be corrected, the notifying party should submit a new notification containing the correct information and indicate in the relevant field of the new template (field (b) of section 2 - "Initial notification/Amendment") that the notification is an amendment, explaining the error that such notification is amending.
Such an approach is considered by ESMA as simpler and clearer, more cost-efficient and less burdensome than an approach based on the designing and use of an "ad-hoc" cancellation template.
Means of submission
The EU Member States' National Competent Authorities are required to specify and publish on their website the electronic means, which are destined for the transmission of the respective notifications.
Those electronic means must ensure that completeness, integrity and confidentiality of the information are maintained during the transmission and provide certainty as to the source of the information transmitted
Application to auction platforms
The requirements for notifications also apply to transactions by persons discharging managerial responsibilities within any auction platform, auctioneer and auction monitor involved in the auctions held under the Auctioning Regulation (No 1031/2010) and to persons closely associated with such persons in so far as their transactions involve emission allowances, derivatives thereof or auctioned products based thereon.
Those persons must notify their transactions to the auction platforms, auctioneers and auction monitor, as applicable, and to the competent authority where the auction platform, auctioneer or auction monitor, as applicable, is registered.
The information that is so notified is made public by the auction platforms, auctioneers, auction monitor or competent authority.
Types of transactions triggering notification duties
MAR requires the notification of all transactions conducted on the own account of the persons discharging managerial responsibilities and closely associated persons.
MAR clearly states that "every" transaction is subject to notification (both point (a) and (b) of Article 19(1) MAR refer to "every transaction").
Article 19(7) of the MAR envisions a non-exhaustive list of transactions to be notified, while the ESMA is mandated to provide a technical advice to the European Commission specifying the types of transactions, which trigger the duty to notify.
It is necessary to be mindful of the fact that under MAR also Member States retain the right to provide for notification obligations other than those indicated above.
MAR in the above-mentioned Article 19(7) refers specifically only to:
(a) the pledging or lending of financial instruments by or on behalf of a person discharging managerial responsibilities or a person closely associated with such a person (the regulatory clarification says that this point also covers borrowing transactions, note also the MAR provision that pledge, or a similar security interest, of financial instruments in connection with the depositing of financial instruments in a custody account does not need to be notified, unless and until such time that such pledge or other security interest is designated to secure a specific credit facility),
(b) transactions undertaken by persons professionally arranging or executing transactions or by another person on behalf of a person discharging managerial responsibilities or a person closely associated with such a person, including where discretion is exercised (ESMA cleared that, with the exception of transaction made under a life insurance policy under the below-mentioned point c, this notification requirement includes also transactions where full discretion is exercised (meaning that there is no instruction whatsoever from the person discharging managerial responsibility or closely associated person) as regards the investment strategy of the contract),
(c) transactions made under a life insurance policy, defined in accordance with Directive 2009/138/EC, where:
(i) the policyholder is a person discharging managerial responsibilities or a person closely associated with such a person,
(ii) the investment risk is borne by the policyholder, and
(iii) the policyholder has the power or discretion to make investment decisions regarding specific instruments in that life insurance policy or to execute transactions regarding specific instruments for that life insurance policy (insofar as a policyholder of an insurance contract is required to notify transactions, an obligation to notify is not incumbent on the insurance company).
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Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers' transactions Article 10 Notifiable transactions 1. Pursuant to Article 19 of Regulation (EU) No 596/2014 and in addition to transactions referred to in Article 19(7) of that Regulation, persons discharging managerial responsibilities within an issuer or an emission allowance market participant and persons closely associated with them shall notify the issuer or the emission allowance market participant and the competent authority of their transactions. Those notified transactions shall include all transactions conducted by persons discharging managerial responsibilities on their own account relating, in respect of the issuers, to the shares or debt instruments of the issuer or to derivatives or other financial instruments linked thereto, and in respect of emission allowance market participants, to emission allowances, to auction products based thereon or to derivatives relating thereto. 2. Those notified transactions shall include the following: (a) acquisition, disposal, short sale, subscription or exchange; (b) acceptance or exercise of a stock option, including of a stock option granted to managers or employees as part of their remuneration package, and the disposal of shares stemming from the exercise of a stock option; (c) entering into or exercise of equity swaps; (d) transactions in or related to derivatives, including cash-settled transaction; (e) entering into a contract for difference on a financial instrument of the concerned issuer or on emission allowances or auction products based thereon; (f) acquisition, disposal or exercise of rights, including put and call options, and warrants; (g) subscription to a capital increase or debt instrument issuance; (h) transactions in derivatives and financial instruments linked to a debt instrument of the concerned issuer, including credit default swaps; (i) conditional transactions upon the occurrence of the conditions and actual execution of the transactions; (j) automatic or non-automatic conversion of a financial instrument into another financial instrument, including the exchange of convertible bonds to shares; (k) gifts and donations made or received, and inheritance received; (l) transactions executed in index-related products, baskets and derivatives, insofar as required by Article 19 of Regulation (EU) No 596/2014; (m) transactions executed in shares or units of investment funds, including alternative investment funds (AIFs) referred to in Article 1 of Directive 2011/61/EU of the European Parliament and of the Council, insofar as required by Article 19 of Regulation (EU) No 596/2014; (n) transactions executed by manager of an AIF in which the person discharging managerial responsibilities or a person closely associated with such a person has invested, insofar as required by Article 19 of Regulation (EU) No 596/2014; (o) transactions executed by a third party under an individual portfolio or asset management mandate on behalf or for the benefit of a person discharging managerial responsibilities or a person closely associated with such a person; (p) borrowing or lending of shares or debt instruments of the issuer or derivatives or other financial instruments linked thereto. |
As a general approach ESMA underlined, however, that the scope of the transactions that trigger the notification duty is broad and cannot be limited to only the three types of transactions explicitly listed in above-cited Article 19(7) of the MAR.
The regulator's view is supported by the following arguments:
- the need for full transparency of the respective transactions,
- the express wording of the recital 58 of MAR,
- the necessity to mitigate the risk of circumvention of the requirement by means of particular types of operations.
Therefore, ESMA identifies the scope of the said obligation by defining its general criteria, which are further specified and supplemented by a non-exhaustive list of particular types of transactions to be notified.
Thus, as Article 19(1) of the MAR refers to "every transaction" conducted on a person's discharging managerial responsibility or a closely associated person's own account, ESMA considers that the transactions to be notified should include, once the threshold is reached, any acquisition, disposal, subscription or exchange of financial instruments of an issuer or related financial instruments, irrespective of its size or significance in relation to the market of the given instrument.
The term acquisition also includes, among others, transactions where the person discharging managerial responsibility or the closely associated person does not play an active role in the investment decision, such as gifts, inheritances and donations received. Similarly, the term disposal should encompass any donation or gift by a person discharging managerial responsibility or a closely associated person.
The second general observation is that transactions are to be notified irrespective of where they were conducted (i.e. on a regulated market, on a MTF, on an OTF, by a systematic internaliser or outside a trading venue (OTC)).
Referring, in turn, to the non-exhaustive list of particular types of transactions, the following points have been stressed by ESMA:
1. Automatic conversions of financial instruments and exercise of warrants are within the scope of reportable transactions.
2. In relation to the conditional trades the requirement to report arises only with the occurrence of the condition, thus when the trade takes place. There is no requirement to report both the contract stipulating the condition and the trade which is executed later on, as such obligation would confuse the market, in particular when the condition does not occur and the trade is not executed (and consequently not reported).
3. Transactions in contract for difference relating to financial instruments of the issuer should also be reported.
4. For the notification of transactions in derivatives, among several approaches that could apply to determine the volume of the transactions to be reported:
- the nominal amount of underlying instruments that the transaction in the concerned derivative contract represents;
- a more complex Delta-adjusted approach; or
- the gross amount received or paid expressed in monetary value;
for sake of simplicity while providing relevant information, regulator considers that the volume should represent the gross amount of cash received or paid for the transaction executed.
5. Transactions in index-related instruments or baskets of financial instruments
ESMA expressed an opinion that transactions executed in index-related instruments or baskets (or derivatives based thereto) are within the scope of transactions to be notified and proposed to condition the requirement to a certain minimal weight carried by the issuer's financial instruments in the relevant index or basket.
In order to define whether a basket or an index-related instrument (or a derivative based thereto) has to be considered a financial instrument linked to the issuer's shares or debt instruments, ESMA has adopted an approach whereby the linkage between the index-related instrument or basket and the issuer's financial instruments is represented by a minimal weight carried by the issuer's financial instruments in the composition of the index or basket.
The appropriate weighting criterion is set at 20%.
Therefore, not all transactions in index-related products or baskets need to be reported, but only those relating to indices or baskets where the above composition weighting criterion applicable to the underlying share and/or debt instrument is met, at the time of the transaction.
As a consequence, ESMA considers that the price to be reported for such transaction should reflect the real value of the underlying instrument (share or debt) included in the index or basket and be proportionate to the representation of the issuer's financial instrument representation in that index or basket.
6. Transactions in units/shares of investment funds
ESMA considers that the transactions executed by a person discharging managerial responsibilities or a closely associated person in the shares/units of an investment fund (UCITS and AIFM) need also to be reported, provided that the financial instruments of the issuer are represented in the composition of the concerned fund at the time of the transactions.
A similar approach as the one for basket/index would apply in relation to the weighting criterion and the determination of the price and volume to report.
Gifts, inheritances and donations
There was a controversy as regards gifts, inheritances and donations received by a person discharging managerial responsibility or a closely associated person.
The letter of law is "every transaction conducted on their own account" (Article 19(1) MAR) has to be notified while ESMA is mandated to provide technical advice to the European Commission specifying the types of transactions which trigger the said duty.
ESMA Securities and Markets Stakeholder Group (SMSG) in its Response to ESMA's Consultation Paper on Draft Technical Standards on the Market Abuse Regulation and on ESMA's draft technical advice on possible delegated acts concerning the Market Abuse Regulation ESMA/2014/SMSG/047 of 10 October 2014 argued ESMA defined the scope of transactions subject to notification in an excessively broad manner, in particular, that the term acquisition is intended also to include gifts, inheritances and donations received, i.e. transactions where the person at issue does not play an active role in the investment decision.
Referring to some EU Member States' examples such as Germany and Italy the aforementioned SMSG document strongly recommended interpretation that transactions by gifts or inheritance should not be subject to notification requirements under Art. 19 (1) MAR.
As the SMSG also argued, a donor does not give relevant signals to the market when he makes a gift/donation to a third party. Furthermore there are no grounds for fearing that he will take advantage of insider knowledge. This applies all the more so in the situation of an inheritance.
However, as follows from Article 10(2)(k) of the Commission Delegated Regulation (EU) 2016/522 of 17 December 2015, the ESMA stance has prevailed in that regard, and gifts, inheritances and donations are included in the respective notification requirements.
Jurisdiction
The rules applicable to notifications are those of the Member State where the issuer or emission allowance market participant is registered, thus notifications are to be made to the competent authority of that Member State.
Level 3 ESMA's clarifications