European Commission publishes legislative proposals for Regulation on market abuse and Directive on criminal sanctions for market abuse | Practical Law

European Commission publishes legislative proposals for Regulation on market abuse and Directive on criminal sanctions for market abuse | Practical Law

The European Commission has published its proposals to replace the existing Market Abuse Directive (2003/6/EC) with a Regulation on insider dealing and market manipulation and a Directive on criminal sanctions for insider dealing and market manipulation. (Free access.)

European Commission publishes legislative proposals for Regulation on market abuse and Directive on criminal sanctions for market abuse

by PLC Financial Services
Published on 20 Oct 2011 • European Union
The European Commission has published its proposals to replace the existing Market Abuse Directive (2003/6/EC) with a Regulation on insider dealing and market manipulation and a Directive on criminal sanctions for insider dealing and market manipulation. (Free access.)
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On 20 October 2011, the European Commission published its proposals to replace the existing Market Abuse Directive (2003/6/EC) (MAD) with a Regulation on insider dealing and market manipulation (MAR) and a Directive on criminal sanctions for insider dealing and market manipulation (CSMAD). Together, the abusive practices of insider dealing and market manipulation are referred to as "market abuse".
The Commission has chosen a Regulation as it considers it to be the most appropriate legal instrument to define the market abuse framework in the EU. It believes that its direct applicability will reduce regulatory complexity and offer greater legal certainty.
Some of the key aspects of the proposed MAR are:
  • Regulating new markets, trading facilities and over-the-counter (OTC) financial instruments.
  • Introducing a new offence of "attempted market manipulation".
  • Strengthening regulatory authorities' investigative and sanctioning powers.
The proposed CSMAD complements the proposed MAR. It defines the two market abuse offences (that is, insider dealing and market manipulation) which should be regarded by member states as criminal offences if they are committed intentionally. Member states must criminalise inciting, aiding and abetting insider dealing and market manipulation, together with attempts at those forms of market abuse. Liability should also be extended to legal persons.
Member states must ensure the market abuse offences defined in the proposed CSMAD are punishable by criminal sanctions which are "effective, proportionate and dissuasive".
The proposed MAR and proposed CSMAD will now be passed to the European Parliament and the Council of the European Union. Once adopted, the proposed MAR will apply from 24 months after its entry into force (on which date MAD will be repealed) and member states will have two years to transpose the proposed CSMAD into national law.
Ian Mason, a partner in the Financial Services group at Baker & McKenzie LLP, comments:
"The new market abuse proposals will give European regulators a stronger toolkit to tackle market abuse.
The scope of the regime is significantly expanded to bring within the market abuse regime modern market developments such as financial instruments admitted to trade on multilateral trading facilities (MTFs) and other organised trading facilities (OTFs), as well as any financial instruments traded over-the-counter (OTC) which can have an effect on the covered underlying market. The market abuse regime applying to commodities trading will be made more consistent with the rest of the regime. There will also be a clampdown on abuse resulting from automated trading methods, such as algorithmic and high frequency trading (HFT) strategies, where those strategies are illegitimate.
Attempted market manipulation, where a person intends to manipulate the market but does not place an order or execute a transaction, is also brought within the net. There are also measures to strengthen investigations such as the powers to enter private premises, seize documents and access telephone records.
The proposals also envisage a more uniform set of criminal and administrative sanctions, and it is particularly interesting that fines on corporates will be based on a proportion of annual turnover, which is more in line with a competition law type approach to sanctions.
As a result of the FSA's increasingly tough approach to tackling market abuse, the UK is generally 'ahead of the game' in many of these areas (for example the increasing number of criminal prosecutions), and many market users will welcome a more level playing field across the EU to reduce regulatory arbitrage."
For a detailed overview of the Commission's MAD review, see Practice note, Hot topics: European Commission's Market Abuse Directive review.
On 20 October 2011, the European Commission published its proposals to replace the existing Market Abuse Directive (2003/6/EC) (MAD) with a Regulation on insider dealing and market manipulation (MAR) and a Directive on criminal sanctions for insider dealing and market manipulation (CSMAD). Together, the abusive practices of insider dealing and market manipulation are referred to as "market abuse".
The Commission has published the following documents relating to its proposals:

Background: MAD review

MAD was adopted by the European Parliament and the European Council in January 2003. Its aim was to introduce a common EU legal framework for the prevention and detection of market abuse and increase co-operation between regulators.
Four further Level 2 technical implementing measures relating to MAD were subsequently adopted and the Committee of European Securities Regulators (CESR) (the predecessor of the European Securities and Markets Authority (ESMA)) published three sets of Level 3 guidance on MAD. For more information on the Level 2 implementing measures and Level 3 guidance, see Practice note, Hot topics: European Commission's Market Abuse Directive review: The Market Abuse Directive.
The Commission has been carrying out a review of MAD in recent years, having identified a range of issues since its implementation by member states. These issues can be broadly categorised into five key areas:
  • Gaps in the regulation of new markets, platforms and over-the-counter (OTC) trading in financial instruments.
  • Gaps in the regulation of commodities and commodity derivatives.
  • Regulators cannot effectively enforce MAD.
  • A lack of legal certainty undermines the effectiveness of MAD.
  • Administrative burdens, especially for small and medium-sized companies (SMEs).
The Commission's proposals aim to address these issues by creating an updated and strengthened market abuse regulatory framework, with tougher and greater harmonisation of sanctions, including possible criminal sanctions.
For a detailed overview of the Commission's MAD review, see Practice note, Hot topics: European Commission's Market Abuse Directive review.

Proposed MAR

The Commission has chosen a Regulation as it considers it to be the most appropriate legal instrument to define the market abuse framework in the EU. It believes that its direct applicability will reduce regulatory complexity and offer greater legal certainty.
The proposed MAR is designed to fit with the Commission's proposals to revise the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) proposals, which were also published by the Commission on 20 October 2011 (see Legal update, European Commission publishes MiFID II legislative proposals). The Commission's approach is to update the MAD and MiFID regimes "in tandem to ensure they are fully coherent and support each other's objectives and principles". The Commission also considers that the pan-EU competition which MiFID has facilitated has given rise to new challenges in the area of cross-border supervision, meaning harmonisation of the rules and competent authorities' powers is necessary.
Some of the key aspects of the proposed MAR are:
  • Regulating new markets, trading facilities and over-the-counter (OTC) financial instruments. MAD prohibits market abuse in financial instruments admitted to trading on a regulated market. To keep pace with market developments, notably since the implementation of MiFID, the proposed MAR will extend to any financial instrument traded on a multilateral trading facility (MTF) or other organised trading facilities (OTF), together with any related financial instrument traded over-the-counter (OTC) (such as a credit default swap (CDS)) that can have an effect on the covered underlying market. This means that trading on all platforms and on all financial instruments which can impact them will be covered by the proposed MAR, to ensure a level playing field.
    The proposed MAR also clarifies which high frequency trading (HFT) strategies amount to prohibited market manipulation, such as submitting orders without an intention to trade, but to disrupt a trading system.
    In addition, in the face of increasingly global commodity markets and their increased interconnectedness with derivative markets, the proposed MAR covers market abuse which occurs across both commodity and derivative markets.
  • Introducing a new offence of "attempted market manipulation". The proposed MAR introduces this new offence, to enable regulatory authorities to impose a sanction in cases where a person attempts to manipulate the market, but does not succeed in trading.
  • Strengthening regulatory authorities' investigative and sanctioning powers. Under the proposed MAR, the current requirement to report suspicious transactions is extended to cover suspicious unexecuted orders and suspicious OTC transactions. Regulatory authorities are afforded the power to obtain telephone and data traffic reports from telecoms operators or to access private documents or premises (subject to a prior judicial warrant) where they reasonably suspect market abuse.
    There are minimum rules under the proposed MAR for administrative measures, sanctions and fines. In particular, 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 twice the amount of any such profit. Member states are not, however, prohibited from setting higher standards.
    The proposed MAR also introduces appropriate protection for whistleblowers reporting suspected market abuse and the possible financial incentives for persons who provide regulatory authorities with information about market abuse which leads to a monetary sanction.
    In addition, the proposed CSMAD requires member states to put in place effective, proportionate and dissuasive" criminal sanctions for the most serious market abuse offences. This is considered in more detail below.

Proposed CSMAD

The proposed CSMAD complements the proposed MAR. It introduces minimum rules on criminal offences and criminal sanctions for market abuse. The Commission's assessment of existing sanctioning regimes demonstrates that "current sanctions are lacking in impact and are insufficiently dissuasive, which results in ineffective enforcement of [MAD]". The Commission has also identified that the current sanction regimes for market abuse applied by member states do not consistently use the same definition of market abuse offences and are divergent, allowing offenders to exploit gaps and loopholes.
It therefore believes that the provisions of the proposed CSMAD are essential to ensure the effectiveness of European policy on market integrity. In its frequently asked questions on the proposed MAR and CSMAD, the Commission states:
"Criminal sanctions demonstrate social disapproval of a qualitatively different nature compared to administrative sanctions or compensation mechanisms under civil law. Common minimum rules on the definition of criminal offences for the most serious market abuse offences would also facilitate the cooperation of law enforcement and judicial authorities in the Union, especially considering that the offences are in many cases committed across borders."
The proposed CSMAD complements the proposed MAR. It defines the two market abuse offences (that is, insider dealing and market manipulation) which should be regarded by member states as criminal offences if they are committed intentionally. Member states must criminalise inciting, aiding and abetting insider dealing and market manipulation, together with attempts at those forms of market abuse. Liability should also be extended to legal persons.
Member states must ensure the market abuse offences defined in the proposed CSMAD are punishable by criminal sanctions which are "effective, proportionate and dissuasive".
In line with the scope of the proposed MAR, transactions for certain purposes are excluded from the scope of the proposed CSMAD, namely:
  • Buy-backs and stabilisation programmes.
  • Monetary policy and debt management activities.
  • Activities concerning emission allowances in pursuit of climate policy.
The proposed CSMAD contains a review clause, requiring the Commission to report, to the European Parliament and Council of the European Union, on the application of the proposed CSMAD and, if necessary, on the need to review it. In particular, the Commission should assess whether it is necessary to carry out a review with regard to the appropriateness of introducing common minimum rules on types and levels of criminal sanctions. The Commission must report within four years of its entry into force and, if appropriate, the report should be accompanied by legislative proposals.
The proposed CSMAD is the first legislative proposal based on the new Article 83, paragraph 2 of the Treaty of the Functioning of the European Union (TFEU), which provides for the adoption of common minimum rules on criminal law when this is considered essential to ensure the effective implementation of a harmonised EU policy.

Next steps

The proposed MAR and proposed CSMAD will now be passed to the European Parliament and the Council of the European Union. Once adopted, the proposed MAR will apply from 24 months after its entry into force (on which date MAD will be repealed) and member states will have two years to transpose the proposed CSMAD into national law.
It is important to note in respect of the proposed CSMAD that, under the Lisbon Treaty, the UK and Ireland are not automatically bound by legislative proposals in respect of the area of freedom, security and justice matters (that is, Justice and Home Affairs). Instead, they are able to decide whether to opt in to any measure on a case-by-case basis (see Protocol No 21 (pages 95 - 98 of the PDF)). The UK and Ireland have three months from the date on which the Council of the European Union is notified of a legislative proposal before deciding whether to opt in. For the proposed CSMAD, the relevant date is 25 October 2011. In respect of the UK, this is explicitly referred to in Preamble clause (20) of the proposed CSMAD.
PLC Financial Services will be producing a hot topics note on the proposed MAR and proposed CSMAD in due course.

Practitioner comment

Ian Mason, a partner in the Financial Services group at Baker & McKenzie LLP, comments:
"The new market abuse proposals will give European regulators a stronger toolkit to tackle market abuse.
The scope of the regime is significantly expanded to bring within the market abuse regime modern market developments such as financial instruments admitted to trade on MTFs and OTFs, as well as any financial instruments traded OTC which can have an effect on the covered underlying market. The market abuse regime applying to commodities trading will be made more consistent with the rest of the regime. There will also be a clampdown on abuse resulting from automated trading methods, such as algorithmic and high frequency trading strategies, where those strategies are illegitimate.
Attempted market manipulation, where a person intends to manipulate the market but does not place an order or execute a transaction, is also brought within the net. There are also measures to strengthen investigations such as the powers to enter private premises, seize documents and access telephone records.
The proposals also envisage a more uniform set of criminal and administrative sanctions, and it is particularly interesting that fines on corporates will be based on a proportion of annual turnover, which is more in line with a competition law type approach to sanctions.
As a result of the FSA's increasingly tough approach to tackling market abuse, the UK is generally 'ahead of the game' in many of these areas (for example the increasing number of criminal prosecutions), and many market users will welcome a more level playing field across the EU to reduce regulatory arbitrage."
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