European Commission publishes Regulation to replace the Market Abuse Directive and proposes Directive on criminal sanctions for market abuse
On 20 October 2011 the European Commission published:
- A proposed regulation (the Regulation) to replace the existing Market Abuse Directive; and
- A proposed directive (the Directive) containing EU-wide rules on criminal sanctions for market abuse and insider dealing.
The Regulation can be read here and the Directive here. The accompanying press releases are here and here, and a set of FAQs are here.
The Regulation
The Market Abuse Directive (the MAD) came into force in 2003. The Commission’s argument is that since 2003, markets and the trading of financial instruments have become increasingly complex and diverse, with the result that a number of problems have been identified with the rules on market abuse and with the powers of regulators:
- Gaps in regulation of new markets, platforms and over-the-counter (OTC) trading in financial instruments.
- Gaps in regulation of commodities and commodity derivatives.
- Regulators cannot effectively enforce the MAD.
- Lack of legal certainty undermines the effectiveness of the MAD.
- Administrative burdens, especially for small and medium-sized companies (SMEs).
The objectives of the Regulation are therefore to:
Keep pace with market developments:
“The regulatory framework provided by the original Market Abuse Directive has been outpaced by the growth of new trading platforms, OTC trading and new technology such as high frequency trading (HFT). The proposal extends the scope of existing EU legislation to financial instruments only traded on multilateral trading facilities (MTFs), other organised trading facilities (OTFs) and OTC so that trading on all platforms and of all financial instruments which can impact them will now be covered by market abuse legislation. It also clarifies which HFT strategies constitute prohibited market manipulation, such as submitting orders without an intention to trade but to disrupt a trading system (“quote stuffing”). Commodity markets have become increasingly global and interconnected with derivative markets, leading to new possibilities for cross-border and cross-market abuse. The scope of the legislation is therefore extended to market abuse occurring across both commodity and related derivative markets.”
Reinforce regulators’ investigative and sanctioning powers:
“The proposal extends the current reporting of suspicious transactions also to suspicious unexecuted orders and suspicious OTC transactions. It grants regulators the power to obtain telephone and data traffic records from telecoms operators or to access private documents or premises where a reasonable suspicion exists of insider dealing or market manipulation. A prior judicial warrant is also required for access to private premises. It also requires Member States to provide for the protection of whistleblowers and sets common rules where incentives are offered for reporting information about market abuse. Finally a new offence of “attempted market manipulation” is introduced to make it possible for regulators to impose a sanction in cases where someone tries to manipulate the market but does not succeed in actually trading. Common principles are proposed, notably that fines should not be less than the profit made from market abuse where this can be determined, and the maximum fine should not be less than two times any such profit.”
Reduce administrative burdens in SME issuers:
“The disclosure requirements for issuers on SME markets will be adapted to their needs, and issuers on such markets will be exempt from the requirement to draw up lists of insiders, unless the supervisor demands otherwise. The threshold for the reporting of managers’ transactions will also be raised.”
The Directive
The Directive will be the first time that the European Commission has used powers under the Lisbon Treaty to enforce an EU policy through criminal sanctions. The Directive would require EU member states to introduce minimum uniform criminal sanctions for insider dealing and market abuse. The Commission argues that at the moment:
“Investors who trade on insider information and manipulate markets by spreading false or misleading information can currently avoid sanctions by taking advantage of differences in law between the 27 EU Member States. Some countries’ authorities lack effective sanctioning powers while in others criminal sanctions are not available for certain insider dealing and market manipulation offences.”
And so the Commission’s view is that “minimum rules on criminal offences for market abuse are essential for ensuring the effectiveness of the EU policy on market integrity”.
Next steps
The Regulation – which if adopted would be directly applicable in EU member states 24 months after coming into force – now passes to the European Parliament and European Council for negotiation and adoption. The Directive similarly passes to the European Parliament and European Council; once adopted, EU member states would have two years to transpose the Directive into national law.
UPDATE 19 June 2012: The House of Commons Library has published a note outlining the history of the existing Market Abuse Directive and briefly summarising the Commission’s proposals for a new Regulation and Directive.
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