MAR: Unintended consequences

MAR applies the same rules on market abuse for debt as it does for equity instruments even though the potential risk of market abuse via debt instruments is far lower. This one-size-fits-all approach, along with divergences of international rules, is driving debt issuers away from the EU, which is unlikely to suit the Capital Markets Union Action Plan’s ambitious objectives. Delisting issuers refer to compliance obligations under MAR as burdensome and costly.

The impact that MAR is having on listings in EU exchanges can be quantitatively measured in two ways. Firstly, there is the clear indicator when an issuer delists from an EU exchange and relists the same securities outside the EU, or simply chooses not to relist. Secondly, there are issuers that are considered regular issuers based on historical listings, which now no longer list on an EU exchange and go outside the EU.

The main evidence of this can be seen in the high-yield bond (HYB) segment. Historically, approximately 90% of all HYBs issued in the EU were listed in the EU. Since July 2016, when MAR was implemented, bond listings in the Channel Islands Securities Exchange (The International Stock Exchange or TISE), a non-EU venue and therefore not covered by MAR, have swiftly increased to more than 26% according to Q1 2015 to Q4 2017 figures from the Association for Financial Markets in Europe (AFME).

In addition, a significant number of primo issuers, mainly from Asia and Latin America, are deciding not to list in the EU for their first bond issuance, referring to MAR in support of their decision. The Luxembourg Stock Exchange lists 34% of all EU listed HYBs, according to Q3 2017 figures from AFME. However, since the introduction of MAR, a number of issuers listed on EU exchanges have decided to delist, specifically citing the market abuse rules as their primary reason to do so. Issuers refer compliance obligations requested by MAR as burdensome and costly.

A significant amount of information, highlighting the negative impact that MAR has on EU capital markets, is publicly available from law and consultancy firms. For new and existing issuers, most of these firms suggest issuers ‘assess the increased compliance burden and, if too onerous, to consider whether to delist and migrate the listing of those securities to an exchange that is more lightly regulated’*. Finally, repeat HYB issuers have removed covenants for maintaining a listing from their documents. This provides an insurance policy to issuers, making it easy to delist in the EU and relist elsewhere if MAR’s impact on cost and effort is disproportionate. Some investors seem to accept this approach.

MAR uses a one-size-fits-all approach, applying the same requirements for all asset classes, regardless of the relative risk of market abuse associated with an individual instrument. Most importantly, market participants have identified that this negatively affects debt instruments. In most cases, debt instruments are unlikely to be impacted by, or contribute to, market abuse.

It is key to fine-tune the application of MAR based on the specificities of financial instruments and markets, assessing impacts, consequences, and working with markets participants to address their concerns and needs. The EU has established its leadership over many decades in generating, managing and trading international debt instruments. The EU has even become home to international debt issuers from all over the world due to its stringent and reasonable regulation providing for safe capital markets.

MAR, in its present form, could turn out to be the one step too far especially for bonds, deterring many non-EU issuers from using EU capital markets for future funding transactions. We, at the Luxembourg Stock Exchange, strongly support the overall objectives of MAR. From the same token, mitigating the risk of market abuse can be achieved in a way that ensures the EU remains a highly competitive and efficient market place, thus avoiding damaging the CMU’s main goals.