Prevention of Financial Markets Abuse

David Joseph Borg | 10 Dec 2013

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Market Abuse prejudices the integrity of financial markets and diminishes public confidence in securities and derivatives as it gives rise to situations where an investor is unfairly disadvantaged by others. The rationale behind the Prevention of Financial Markets Abuse Act is to safeguard the integrity of Maltese and European Union financial markets and to strengthen investor confidence in those markets.

Part A – Market Abuse

Market Abuse prejudices the integrity of financial markets and diminishes public confidence in securities and derivatives as it gives rise to situations where an investor is unfairly disadvantaged by others. The rationale behind the Prevention of Financial Markets Abuse Act is to safeguard the integrity of Maltese and European Union financial markets and to strengthen investor confidence in those markets.

Insider dealing

Insider dealing occurs where a person uses or attempts to use inside information to his own benefit or to the benefit of others. There are three categories of inside information:

Precise information in respect of financial instruments that are not commodity derivatives which has not been made public and which relates, directly or indirectly, to one or more issuers or financial instruments. Such information, if it were made public, would be likely to significantly impact the price of the relevant financial instruments.

Precise information in relation to derivatives on commodities which users of the markets on which such derivatives are traded would expect to receive in accordance with accepted market practices, but which has not been made public.

In the case of persons charged with the execution of orders concerning financial instruments (Investment Services Licence Holders) inside information also includes precise information provided by a client in relation to pending orders which relates, directly or indirectly, to one or more issuer or financial instruments. If made public, such information would likely have a significant impact on the prices of those financial instruments or on the price of related derivative financial instruments. 

Persons in possession of inside information are prohibited from dealing or attempting to deal in financial instruments, encouraging others to deal or disclosing the inside information.

In order for information to be considered precise, it must indicate circumstances which exist or which may reasonably be expected to come into existence.

Use of inside information can consist in the acquisition or disposal of financial instruments by a person who knows, or reasonably ought to have known, that the information possessed is inside information.

Price sensitive information is information which a reasonable investor would be expected to use in making investment decisions and which if made public would probably have a considerable impact on the prices of financial instruments or related derivative financial instruments. The precise nature of information and its potential impact on price has to be assessed on a case-by-case basis and it is not necessary for a piece of information to be comprehensive in order to be considered precise. In fact, information could be regarded as precise even though it refers to matters or events in the alternative.

Information is deemed to be specific enough to be able to draw conclusions about its impact on prices in two particular circumstances:

1.     When information allows a reasonable investor to take an investment decisions without, or at very low, financial risk;

2.     When the information is likely to be exploited immediately by market participants as soon as it becomes known.


The following is a non-exhaustive and purely indicative list of events which might constitute inside information

Information which directly concerns the issuer:

(a) Operating business performance;

(b) Changes in control and control agreements;

(c) Changes in management and supervisory boards;

(d) Changes in auditors or any other information related to the auditor’s activity;

(e) Operations involving the capital or the issue of debt securities or warrants to buy or subscribe securities;

(f) Decisions to increase or decrease the share capital;

(g) Mergers, splits and spin-offs;

(h) Purchase or disposal of equity interests or other major assets or branches of corporate activity;

(i) Restructurings or reorganisations that have an effect on the issuer’s assets and liabilities, financial position or profits and losses;

 (j) Decisions concerning buy-back programmes or transactions in other listed financial instruments;

(k) Changes in class rights of the issuer’s own listed shares;

(l) Filing of petitions in bankruptcy or the issuing of orders for bankruptcy proceedings;

(m) Legal disputes;

(n) Revocation or cancellation of credit lines by one or more banks;

(o) Dissolution or verification of a cause of dissolution;

(p) Changes in the assets’ value;

(q) Insolvency of relevant debtors;


Information which indirectly concerns the issuer:

(a) Data and statistics published by public institutions disseminating statistics;

(b) The forthcoming publication of rating agencies’ reports;

(c) The forthcoming publication of research, recommendations or suggestions concerning the value of listed financial instruments;

(d) Central bank decisions concerning interest rates;

(e) Government’s decisions concerning taxation, industry regulation, debt management, etc.;

(f) Decisions concerning changes in the governance rules of market indices, and especially as regards their composition;

(g) Regulated and unregulated market’s decisions concerning rules governing the markets;

(h) Completion and market authorities’ decisions concerning listed companies;

(i) Relevant orders by government bodies, regional or local authorities or other public organisations;

(j) A change in trading mode (e.g. information relating to knowledge that an issuer’s financial instruments will be traded in another market segment: e.g. change from continuous trading to auction trading); a change of market maker or dealing conditions



An issuer is not bound to respond to false rumours such as articles published in the press or internet postings not resulting from the issuer’s initiative. Nevertheless, an issuer is obliged to disclose any inside information as soon as possible, unless delay is necessary to safeguard its legitimate interests or if there is no risk that the public would be misled if such information is not immediately disclosed.

On the other hand, where a publication or rumour relates explicitly to a piece of information which is sufficiently accurate to indicate that a leak of information has occurred and confidentiality of the inside information is no longer ensured, the issuer is expected to react and respond without undue delay. A policy of staying silent or of ‘no comment’ would not be adequate in such a scenario.


Price sensitive information and information of a precise nature relating to client pending orders

In the case of persons charged with the execution of orders concerning financial instruments, ‘inside information’ also includes information conveyed by a client and related to the client’s pending orders. An order for a client is pending when the transaction is not immediately executed or when the person charged with executing the order has taken on a legal or regulatory obligation relating to the manner or timing of the execution of the transaction.

The price sensitivity of a client’s pending order likely depends on the order’s size, the liquidity of the market, the price limits of orders and the execution timeframe.


Market Manipulation

Market manipulation consists of distorting the price of financial instruments, or effecting transaction or orders to trade, or disseminating information in manner likely to give false or misleading signals about financial instruments. There are four ways in which the market can be manipulated:

(i)             False or misleading transactions or orders which give false or misleading indications about the demand for, the supply of, or the price of a financial instrument. Examples include wash trades, painting the tape, improper matched orders as well as placing orders with no intention of executing them.

(ii)            Price Positioning, where transactions or orders to trade secured by a person or persons acting in collaboration, fix the price of one or several financial instruments at an abnormal or artificial level. Instances of price positioning include marking the close, colluding in the aftermarket of an Initial Public Offer, abusive squeeze, creation of a floor in the price pattern, excessive bid-ask spread as well as trading on one market to improperly position the price of a financial instrument on a related market.

(iii)           Fictitious devices, where transactions or orders to trade make use of fictitious devices or other forms of deception. Transactions which could be regarded as fictitious devices include transactions designed to conceal ownership, the dissemination of false or misleading market information through the media or any other means, pump and dump by taking a long position in a security and then undertaking further buying activity, trash and cash by taking a short position in a security or opening a position and closing it immediately after its public disclosure.

(iv)          Dissemination of false or misleading information in order to provide misleading signals, news or rumours about financial instruments by persons who knew or ought to have known that the information was false or misleading. The creation of a misleading impression by failing to properly disclose price sensitive information would also amount to false or misleading information.



The prohibition concerning market manipulation is not absolute. In relation to ‘false or misleading transactions’ and ‘price positioning’, no offence will be deemed to have occurred if it can be shown that there are legitimate reasons for such behaviour which conforms to accepted market practice. What constitutes accepted practice or not lies within the responsibility of the MFSA.


The provisions of the Prevention of Financial Markets Abuse Act apply to financial instruments admitted to trading on a regulated market in Malta or in any EU or EEA state. It is also applicable to Off-Exchange deals in terms of the Off-Exchange Trading Regulations.


Administrative or Criminal Sanctions


A person found guilty of market abuse may be subject to either:


(a) A fine sanctioned by the MFSA which may not exceed €150,000; or

(b) Upon conviction by the Criminal Court, a fine which may not exceed € 940,000 or up to three times the profit made or the loss avoided by virtue of the said person’s actions, whichever is the greater, or to imprisonment for a term not exceeding seven years or to both such fine and imprisonment.



Exemptions - Buyback Programmes and Stabilisation of Financial Instruments


The provisions of the Prevention of Financial Markets Abuse Act prohibiting market abuse do not apply to

a)     trading in own shares in ‘buy back’ programmes, or

b)    action taken for the purpose of stabilising the price of financial instruments.


This exemption only applies in relation to behaviour directly related to the purpose of buy-back and stabilisation activities.


-          Buyback programmes

A buy-back programme consists of trading in own shares for the sole purpose of reducing the capital of an issuer, or to meet obligations arising from debt financial instruments exchangeable into equity instruments or employee share option programmes.

-          Stabilisation of a Financial Instrument

Stabilisation is defined as any purchase or offer to purchase relevant securities by investment firms or credit institutions in the context of a significant distribution exclusively for supporting the market of these securities for a predetermined period of time. In order to benefit from the exemption there are a number of public disclosure and reporting requirements via the use of information dissemination and storage mechanisms set up in the particular member state. Alternatively, a news-wire service could be used to effect public disclosure, yet the obligation to trade report/notify to the MFSA persists.  



Part B – Duties/ Disclosure Obligations


The Prevention of Financial Markets Abuse Act imposes certain requirements on issuers of financial instruments and on persons professionally arranging transactions, such as investment services licence holders, to make sure that the MFSA and the Maltese market have access to a proper flow of information.


Requirements of issuers of financial instruments


Issuers of financial instruments admitted to a regulated market are obliged to:


i)              Disclose inside information to the general public promptly by way of a public announcement on the internet site of the company for as long as such information is relevant. It must also be disseminated to the public through a Regulated Market in the form of a company announcement;

Issuers may delay disclosure to safeguard their legitimate interests, provided confidentiality is ensured and the public is not misled. Reasons are to be notified to MFSA.

ii)            Issuers are required to draw up a list of insiders, i.e., persons who have regular or occasional access to inside information such as Directors, Senior Officers, auditors, attorneys and tax advisors. The list of insiders should be regularly updated and transmitted to the MFSA Securities and Markets Supervision Unit and must be submitted in the form set out in Schedule III of Legal Notice 108 of 2005. It is advisable that issuers make every effort to keep inside information known to as small a group of people as possible. Issuers may outsource the preparation of insiders’ list.



Requirements of Persons discharging managerial responsibilities within an issuer of financial instruments registered in Malta 


The disclosure of management transactions provides investors with additional qualitative insight with regard to their investment decisions. Persons discharging managerial responsibilities within an issuer of financial instruments registered in Malta whose instruments have been admitted to trading on a Regulated Market need to notify the MFSA Securities and Markets Supervision Unit of the existence of transactions conducted on their own account relating to shares of the said issuer or financial instruments linked to them.


Persons who would be discharging managerial responsibilities within an issuer include:


-          Board of Directors

-          Executive Committee

-          Management Committee

-          Audit Committee

-          Remuneration Committee


The same duty of disclosure also applies to persons closely associated with a person discharging managerial responsibilities within an issuer, such as the spouse or equivalent, dependent children and any other relatives who have shared the same household for at least one year on the date of the transaction concerned, amongst others.


In all cases, notification is not required until the total amount of transactions has reached the equivalent of €5,000 at the end of a calendar year. Whilst the responsibility for making the notification lies on the person on whose behalf the transaction was made, or the person related to them, company secretaries are expected to provide the necessary assistance. Notification must be made in the form set out in Schedule I of Legal notice 108 of 2005.


Duty of notification of persons professionally arranging transactions in financial instruments


·         A person professionally arranging transactions in financial instruments who has a reasonable suspicion that a transaction might constitute the prohibited use of inside information or market manipulation shall within one working day notify the MFSA Securities Unit. The rule applies to all investment services licence holders as well as branches of credit institutions and investment firms operating in Malta, who have a duty of confidentiality not to inform any other person of such notification.


·         The notification should be in the form of a Suspicious Transaction Report (STR) as provided in Schedule II of Legal Notice 108 of 2005 and may be submitted in written form by mail, by electronic mail or telecopy or fax. This duty applies to both transactions on an equity regulated market as well as to suspicious transactions involving instruments admitted to trading in non-equity regulated markets.


·         Any information and documents which may have significance in reviewing a case should be included in a Suspicious Transaction Report, such as any relevant news items or articles, reasons why a trade or series of trade may not be in tendon with a client’s usual trading pattern as well as recordings or transcripts of recordings with the client.


·         The licence holder has sole responsibility for determining whether to report suspicious transactions and what information to provide to the MFSA. In case of doubt, the Licence Holder should discuss the details of the case with the MFSA and retain all relevant records of potentially suspicious transactions not as yet reported to the MFSA. Persons under suspicion should in no circumstance be ‘tipped off’.


·         Whilst a transaction by itself may not seem suspicious, indications of market abuse could surface when seen in perspective with other transactions or information. Transactions which in the light of subsequent events or information retrospectively become suspicious also have to be reported. This does not mean, however, that persons professionally arranging transactions have to retroactively review transactions in the run-up to that event or development.


·         The personnel of financial intermediaries should be well trained in detecting and reporting suspicious transactions, and Licence Holders may use IT tools to assist in this regard. All new relevant staff of the Licence Holder should receive training accordingly and the content of the training programme should be updated whenever necessary.


·         Depending on the size of the Licence Holder, a suspicious transaction reporting officer should be appointed, who must have adequate staff and other resources to carry out the task. In deciding where the suspicious transaction reporting function should be located, account should be taken of the speed of detection and investigation, sufficient knowledge and confidentiality.



The following is a list of possible signs of Insider Dealing:


1)     The client opens an account and immediately gives an order to carry out a significant transaction

2)     The client’s requested transaction or investment behaviour is significantly out of character with previous investment behaviour

3)     The immediate execution of an order is requested regardless of the price

4)     Significant trading by major shareholders prior to the publication of important corporate events

5)     The announcement of price sensitive information is preceded by unusual trading in the shares of a company.

6)     Client involvement in transactions concerning a portfolio that he has placed under the discretionary management of another person.

7)     Employee’s own account transactions and related orders timed just before clients’ transactions


Potential signals of false or misleading transactions or price positioning (Market Manipulation)


i)              When orders to trade given or transactions undertaken represent a significant proportion of transactions in the relevant financial instrument on a regulated market, causing significant changes in its price;

ii)             When orders to trade or transactions by persons with a significant buying and selling position cause a considerable change in the price of a financial instrument or underlying asset;

iii)            Whether transactions undertaken lead to no change in the beneficial ownership of a financial instrument;

iv)            When orders to trade or transactions include position reversals over a short span of time, constituting a significant proportion of the daily volume or transactions in the financial instrument and leading to a significant change in price;

v)             When orders to trade or transactions are concentrated within a short time span in the trading session and cause a shift in price which is later reversed;

vi)            The extent to which orders to trade change the representation of the best bid for a financial instrument, and which are removed before execution;

vii)           When orders to trade or transactions occur at a specific time when reference and settlement prices, leading to price changes.


Possible signals of manipulative behaviour related to the employment of fictitious devices


a)     Whether orders to trade or transactions are preceded or followed by the spreading of false or misleading information by the persons linked with them;

b)    Whether persons who give orders or undertake transactions produce or disseminate erroneous or biased research or investment recommendations. 


Other possible signals of market manipulation


(i)             Transactions with no other apparent justification than to increase/decrease the price of, or the volume of trading in, a financial instrument, especially nearing the close;

(ii)            When a client submits sizeable orders which will impact on the supply of or demand for a security or its price, particularly near to a reference point during the trading day, such as near the close;

(iii)           Transactions which appear to solely attempt to increase the price of a financial instrument, or to maintain it, during the days preceding the issue of a related derivative;

(iv)          Transactions which seek to modify the valuation of a position whilst not affecting its size;

(v)           When transactions appear to attempt to set a market price for a financial instrument at a time when its liquidity is not sufficient to fix a price within the session;

(vi)          Transactions which attempt to bypass the trading safeguards of the market;

(vii)         When execution of a transaction changes the bid-ask price as computed by the trading system;

(viii)        The logging of significant orders in the central order book of the trading system a few minutes before the price determination phase of the auction and cancelling them a few seconds before the order book is frozen;

(ix)          Transactions which seem to maintain the price of the underlying financial instrument below the strike price of a related derivative at expiration date;

(x)           Transactions aimed at modifying the price of the underlying financial instrument so that it crosses over the strike price of a related derivative at expiration date;

(xi)          Transactions which seek to modify the settlement price of a financial instrument when the latter is used as a reference in calculating margins requirements;


Duties of Producers of Recommendations


Recommendations with respect to financial instruments should be fairly presented and disclose any possible conflicts of interests which the persons producing them may have.  A recommendation consists of research or other information suggesting an investment strategy concerning one or more financial instruments or issuers of financial instruments which is intended for distribution channels or for the public.


The rules addressed to producers of recommendations in Malta mainly affect Investment Services Licence Holders and EU/EEA based investment firms and credit institutions providing investment services in Malta. Producers of recommendations should disclose their identity and are subject to standards concerning the dissemination of recommendations by third parties.


Administrative Sanctions


Persons who do not fulfil their duties in terms of the Prevention of Financial Markets Abuse Act, the relevant legal notices and the rules issued by the MFSA may be subject to a fined imposed by the latter not exceeding €150,000.







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