The European Commission has published its proposals for a Regulation on insider dealing and market manipulation ("the Regulation") and a Directive on criminal sanctions for intentional market abuse ("the Directive"). The new measures will extend the scope of the existing regime to ensure that regulation keeps pace with market developments, to reinforce the investigative and sanctioning powers of regulators, and to better combat market abuse across commodity and related derivative markets.

The Commission has also published Frequently Asked Questions on the proposals and Frequently Asked Questions on Emissions Allowances. The proposals accompany revisions to the Markets in Financial Instruments Directive which aim to increase financial market oversight and transparency. 

The proposals address a variety of issues which are perceived to have a negative impact on market integrity and investor protection, and remove some inequalities permitted by options and discretions in the existing Market Abuse Directive ("MAD").  They aim to ensure that regulators across the EU have the information and powers they need to enforce the regime effectively.

When enacted, the Regulation will have direct effect in Member States without the need for national implementing legislation.  The Directive on criminal sanctions will require national implementation, which seems to be intended to coincide with the coming into application of the Regulation. 

The Directive aims to set minimum rules on the definition of the most serious market abuse offences, and to impose minimum levels of criminal sanctions to be attached to them.  Member States will notably be required to ensure that firms are liable for offences committed for their benefit by persons with leading positions in the firm, and to ensure that firms can be held liable where the lack of supervision or control by such a person enables the commission of a serious market abuse offence.

KEY CHANGES AT A GLANCE Scope

  • The market abuse regime will be extended to cover:
    • financial instruments traded on multilateral trading facilities (MTFs) and organised trading facilities (OTFs), and any related financial instruments traded over-the-counter which could impact the covered underlying market
    • abusive behaviour on spot commodity markets impacting on financial instruments, and behaviour in relation to financial instruments impacting the related spot markets
    • emission allowances and other related auctioned products based thereon, for which there will be a modified definition of inside information
  • Monitoring obligations for MTFs and OTFs
  • Exclusions for buy-back, stabilisation, monetary and public debt management, and climate policy activities  

Insider dealing and market manipulation

  • Distinct definitions of inside information for financial instruments, commodities derivatives, emission allowances and information affecting the price of related spot commodity contracts
  • A "reasonable investor" catch-all added to the definition of inside information, for information that a reasonable investor would regard as relevant in deciding on terms of transactions (such information is not subject to the public disclosure requirements)
  • Use of inside information to cancel or amend pre-existing orders will be caught
  • Attempts to manipulate the market, and attempted insider dealing, will be covered
  • Certain algorithmic and high frequency trading strategies including layering, spoofing and quote stuffing to be expressly prohibited as forms of market manipulation
  • Non-exhaustive lists of indicators of manipulative behaviour
  • Requirement for controls for the prevention and detection of market abuse

Disclosure of inside information

  • Only price-sensitive inside information will be required to be publicly disclosed
  • Non price-sensitive inside information may not be used/improperly disclosed (and will therefore need to be controlled)
  • Issuers will be required to inform the competent authority of a decision to delay public disclosure of (price-sensitive) inside information immediately after the information is disclosed
  • Competent authorities will permitted to allow delayed disclosure in the interests of financial stability
  • Modified disclosure requirements for issuers in the SME growth markets
  • Disclosure obligations for emission allowance market participants for inside information regarding emission allowances held for its business, including installations and aviation activities, owned, controlled or operated by the participant, its parent or affiliate (minimum threshold for emissions/rated thermal input to be set)
  • A requirement for managers (PDMRs) within issuers or emission allowance market participants to report transactions in shares, related financial instruments or in emission allowances above a threshold of €20,000 per annum; auction platforms, auctioneers and auction monitors in relation to emission allowances or related auctioned products are subject to the same reporting requirement
  • PDMR transactions to be reported expressly include loans, pledges, and transactions by portfolio managers (discretionary managers included)
  • The Commission will be able to prescribe information for insider lists

ESMA and competent authorities

  • ESMA to draft a large number of technical standards, including in respect of appropriate controls to prevent and detect market abuse
  • Requirements for competent authorities to cooperate with each other, ESMA, ACER and national regulatory authorities for emissions
  • Requirement to coordinate enforcement action to avoid possible duplication and overlap in cross-border cases: ESMA may assume coordination role if requested by a competent authority
  • Enhanced investigations powers for competent authorities, including to:
    • require access to spot commodity market traders' systems
    • conduct searches at private premises and seize documents
    • obtain telephone and data traffic records from telecoms operators

Administrative measures and sanctions

  • Sanctions for market abuse, but also (inter alia) for failure to:
    • have in place effective controls to prevent/detect market abuse
    • cooperate in an investigation
    • provide documents/information requested by competent authority
    • take reasonable care to ensure objective presentation or disclose conflicts when producing/disseminating information recommending/suggesting an investment strategy intended for distribution channels/the public
    • maintain insider lists
    • comply with request to cease an abusive practice, suspend trading, or publish a corrective statement
  • Minimum rules for administrative sanctions for competent authorities, including to:
    • impose temporary bans
    • impose fines of up to twice profits gained/loss suffered
    • impose fines of up 10% of annual turnover for firms (relevant annual turnover of ultimate parent)
    • impose fines of up to €5,000,000 on individuals
  • Accepted market practices to be phased out

Whistleblower protections to be introduced; national discretion to offer financial incentives for those not already under obligation to report Criminal sanctions

  • Criminal sanctions for intentional insider dealing and market manipulation, and attempts
  • Criminal sanctions to be effective, proportionate and dissuasive
  • Liability for firms where offences are committed by individuals with a leading position within the firm
  • Liability for firms where a failure of supervision/control by such individuals made the commission of the offence possible  

Timing

The proposals envisage that the Regulation would enter into force the day after its publication in the Official Journal of the European Union. It is not inconceivable that the legislative process could be completed within 6 months, so that the Regulation entered into force in mid 2012.

However, the Regulation would not then enter into application for 24 months. During this period, the MAD would remain in force and the Commission would prepare implementing measures and ESMA would draft binding technical standards for adoption.  Once the Regulation comes into application, MAD will be repealed. 

The intention appears to be that national implementation of the Directive should coincide with the coming into application of the Regulation, although this obviously cannot be guaranteed.

This means that the new regime could (potentially) apply from around mid-2014.

Transitional provisions would allow accepted market practices, existing before the Regulation comes into force and notified to ESMA by the relevant competent authorities before the Regulation comes into application, to remain in place for a further 12 months thereafter.

We will be publishing a more detailed analysis of the proposals in due course