Category: PPAET

Published: 07 September 2017

Last Updated: 31 March 2023

 

Pursuant to Article 3(1)(28) of the Market Abuse Regulation (MAR) ‘person professionally arranging or executing transactions’ (sometimes the acronym "PPAET" is used) is "a person professionally engaged in the reception and transmission of orders for, or in the execution of transactions in, financial instruments".

25 November 2022 Questions and Answers on the Market Abuse Regulation (MAR), ESMA70-145-111 updated Questions and Answers on the Prevention and detection of market abuse - ESMA underlines that the PPAET regime applies also to investment firms providing direct electronic access (DEA providers) with respect to their DEA clients’ trading activity.

 

The provisions o PPAET are the first line of defence in the fight against market abuse - at firm level, where arrangements, systems and procedure have to be implemented to ensure that potentially abusive trading is detected and reported in the form of a suspicious transaction and order report (STOR). Their presence represents both an ex-ante deterrence and a way to promote detection post facto (the view expressed in the ESMA Final Report of 28 March 2022: Emission allowances and associated derivatives, ESMA70-445-38, p. 20).

The definition of “person professionally arranging or executing transactions” laid down in point (28) of Article 3(1) of MAR is "activity based, does not cross refer to definitions under MiFID and is independent from the latter" (ESMA's Questions and Answers on the Market Abuse Regulation (MAR) ESMA70-145-111).

According to Article 16 of the MAR, any person professionally arranging or executing transactions is required to establish and to maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions. Such a person must notify the competent authority without delay where it has a reasonable suspicion that an order or transaction in any financial instrument, whether placed or executed on or outside a trading venue, could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation. 

See also:   Persons professionally arranging transactions - PPAT (REMIT Definitions)

Requirements for the said systems and procedures as well as notification templates to be used are stipulated in detail in the Commission Delegated Regulation (EU) 2016/957 of 9 March 2016.

 It is extremely important that the scope of Article 16(2) of MAR is not only limited to firms or entities providing investment services under MiFID.

 

The obligation to detect and identify market abuse or attempted market abuse under Article 16(2) of MAR applies broadly, and “persons professionally arranging or executing transactions” include buy side firms, such as investment management firms (AIFs and UCITS managers), as well as firms professionally engaged in trading on own account (proprietary traders). ESMA, moreover, underlines that also non-financial firms are in the scope of the respective requirements. In the aforementioned ESMA's Questions and Answers on the Market Abuse Regulation updated on 1 September 2017 ESMA explicitly stressed:

"Non-financial firms that, in addition to the production of goods and/or services, trade on own account in financial instruments as part of their business activities (e.g. industrial companies for hedging purposes) can be considered firms professionally arranging or executing transactions in financial instruments under Article 16(2) of MAR.

The fact that they have staff or a structure dedicated to systematically deal on own account, such as a trading desk, or that they execute their own orders directly on a trading venue as defined under MiFID II, are indicators to consider a non-financial firm as a person professionally arranging or executing transactions."

 
Moreover, on 25 November 2022 ESMA updated the MAR Questions and Answers once more and underlined that the PPAET regime applies also to investment firms providing direct electronic access (DEA providers) with respect to their DEA clients’ trading activity.

It is noteworthy that, according to Article 3(2) of the said Commission Delegated Regulation (EU) 2016/957 of 9 March 2016, persons professionally executing or arranging transactions and market operators and investment firms operating trading venues must, upon request, provide the competent authority with the information to demonstrate the appropriateness and proportionality of their systems in relation to the scale, size and nature of their business activity, including the information on the level of automation put in place in such systems.

 

Elements of the regulatory framework

 

Among the requirements of the said Commission Delegated Regulation (EU) 2016/957 of 9 March 2016, which are placed upon persons professionally executing or arranging transaction, the following are particularly noteworthy:

1. Appropriateness and proportionality of systems used: the requirement to provide the competent authority, upon request, with the information to demonstrate the appropriateness and proportionality of systems in relation to the scale, size and nature of business activity, including the information on the level of automation put in place in such systems;
2. Human analysis: the requirement to put in place and maintain arrangements and procedures that ensure an appropriate level of human analysis in the monitoring, detection and identification of transactions and orders that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation;
3. Documentation's retention period: requirement to maintain for a period of five years the information documenting the analysis carried out with regard to orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation which have been examined and the reasons for submitting or not submitting a suspicious transaction and order report’ (STOR). That information must be provided to the competent authority upon request.

It is noteworthy, MAR includes a list of indicators of market manipulation that firms “must be mindful of in ensuring their systems and procedures are effective.” 

Delegation of functions of monitoring, detection and identification of suspicious orders and transactions

 

Within the groups persons professionally arranging or executing transactions have the right to delegate to a legal person forming part of the same group the performance of the functions of monitoring, detection and identification of orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation. When such functions are centralised in this manner, the delegation requires a written agreement.

The person delegating those functions remains, however, fully responsible for discharging all of its obligations under MAR and its secondary legislation and must ensure the arrangement is clearly documented and the tasks and responsibilities are assigned and agreed, including the duration of the delegation.

  

Delegation of data analysis and of the generation of alerts necessary to conduct monitoring, detection and identification of suspicious orders and transactions

 

A person professionally arranging or executing transactions may, by written agreement, delegate the performance of data analysis, including order and transaction data, and the generation of alerts necessary for such person to conduct monitoring, detection and identification of orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation to a third party (‘provider’). Such delegation is possible also outside of company's groupings.

The person delegating those functions remains fully responsible for discharging all of its obligations under MAR and its secondary legislation and must comply at all times with the following conditions: 

(a) it must retain the expertise and resources necessary for evaluating the quality of the services provided and the organisational adequacy of the providers, for supervising the delegated services and for the management of the risks associated with the delegation of those functions on an ongoing basis;

(b) it must have direct access to all the relevant information regarding the data analysis and the generation of alerts.

The obligation to report STOR as well as the responsibility to comply remains with the delegating person (recital 4 of the Regulation 2016/957).

The written agreement in such a case must contain:

- the description of the rights and obligations of the person delegating the functions and those of the provider,
- the grounds that allow the person delegating the functions to terminate such agreement.

 

Enforcement

 

Regulatory regime regarding PPAET is rigorous and subject to sanctions. By way of example, on 19 August 2022 the UK Financial Conduct Authority (FCA) issued the Final Notice regarding Citigroup Global Markets Limited (CGML) stating that between 2 November 2015 and 18 January 2018 CGML breached the requirements of Article 16(2) of MAR by failing to conduct its business with due skill, care, and diligence.

According to the said FCA’s Notice, CGML’s breach comprises the following failures:

a) CGML’s implementation of the requirements of Article 16(2) was flawed.
i. CGML proceeded to implement Article 16(2) without initially considering the secondary legislation that supplemented MAR.
ii. CGML’s initial MAR gap analysis, which was not completed until October 2017, did not provide CGML with the means to prioritise the most serious market abuse risks affecting its business.
iii. CGML did not begin preparing an Article 16(2) risk assessment until December 2017.

b) The failure to accurately track the implementation of the requirements of Article 16(2).
i. The MAR Working Group, which was one of the forums involved in the implementation of the requirements of Article 16(2), failed to provide sufficient oversight of the implementation of the requirements of Article 16(2).
ii. CGML failed to define the scope of the MAR implementation objective in its 2016 EMEA Compliance Plan. As a result compliance with Article 16(2) was not agreed as a prerequisite for the completion of the objective.
iii. CGML’s UK Business Risk, Compliance, and Controls committee and the CGML Board were both wrongly informed in late 2016 that MAR implementation was complete.
iv. EMEA Compliance failed to properly evaluate and monitor work relating to Article 16(2) implementation that was conducted as part of a global markets remediation programme undertaken by Citigroup.

 

 

 

 

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