The legislative proposals by the European Commission of 20 October 2011 aim to replace and to extend the existing legal framework based on the Market Abuse Directive 2003/6/EC and to adapt it to market developments since 2003. Notably, the market abuse regime shall be extended to cover financial instruments traded on multilateral trading facilities (MTFs) and other new types of organized trading facilities (OTFs) in at least one Member State as well as financial instruments traded over-the-counter (OTC). EU emission allowances will come within the scope of the market abuse regime for the first time. Further measures shall particularly include criminal sanctions for market abuse in all European jurisdictions.
On 25 October 2011, the European Commission adopted (i) a proposal for a regulation of the European Parliament and of the Council on insider dealing and market manipulation (market abuse) (the "Market Abuse Regulation"; "MAR") and (ii) a proposal for a directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market manipulation (the "Market Abuse Directive 2"; "MAD2"). The proposals are the result of a process initiated in 2008 in a conference on the review of the European market abuse law regime, followed by a call for evidence on the review of the Market Abuse Directive in 2009 and a public consultation process in July 2010.
The Commission proposals have now been passed to the European Parliament and the Council for negotiation and adoption. Once adopted, Member States of the European Union will have two years to implement MAD2 into their national laws whereas MAR would apply directly from 24 months after its entry into force.
Market Abuse Regulation
By introducing a harmonized set of core rules with the directly applicable MAR, the Commission aims to reduce regulatory complexity and enhance legal certainty. Selected issues imposed by the MAR relate to the following:
- Scope of application extended
In contrast to the Market Abuse Directive, which is based on the concept of prohibiting insider dealing or market manipulation in financial instruments admitted to trading on a regulated market, the scope of application of the European market abuse laws will be significantly extended by MAR. Financial instruments admitted to trading on a multilateral trading facility (MTF) or on the new category of organized trading facilities (OTFs) only will now be covered by European legislation as will be financial instruments traded over-the-counter (OTC). In particular, market manipulation by derivates traded OTC (e.g. Credit-Default-Swaps (CDS)) shall be prohibited as OTC derivatives can affect the covered underlying market.
In addition, MAR aims to improve protection against market abuse through commodity derivatives. Transactions only relating to commodity spot markets do not fall under the scope of MAR. However, MAR extends the scope of market manipulation to cover transactions in spot commodity contracts or behaviors on commodity spot markets which are related to and have an effect on financial and derivative markets. Further, the proposal clarifies that market abuse occurring across both commodity and related derivative markets is prohibited.
Emission allowances will be reclassified as financial instruments as part of the review of MiFID. Accordingly, they will also fall under the scope of the market abuse framework. Participants in the emission allowance market will be obliged to disclose inside information on emission allowances as they hold the relevant information suitable for ad hoc and periodic disclosure rather than the respective issuers of emission allowances.
- Market manipulation by algorithmic and high frequency trading
In light of increasing automated trading systems based on algorithmic or high frequency trading mechanisms, the Commission proposal of MAR includes a reference to certain prohibited automated trading strategies, e.g. quote stuffing, layering and spoofing. Whereas most automated trading strategies are still legitimate, Article 8 para 3 lit c MAR contains a non-exhaustive list of market manipulation techniques related to abusive algorithm based behaviors.
- Attempted market manipulation
Attempts of market manipulation shall be prohibited because market manipulation may occur even though an order was not placed or a transaction was not executed. This will enable authorities to impose sanctions when someone unsuccessfully attempts market manipulation.
- Abuse of inside information vs. ad hoc disclosure
According to MAR, inside information can be abused even before an issuer is under the obligation to disclose such information ad hoc to the public because it is not sufficiently precise. In such cases, the prohibition against insider dealing should apply, but the obligation on the issuer to disclose the information should not. By way of example the state of contract negotiations, terms provisionally agreed in contract negotiations, the possibility of a placement of financial instruments, conditions under which financial instruments will be marketed, or provisional terms for the placement of financial instruments may be relevant information for investors and may therefore constitute inside information.
- Increased power of authorities
Administrative authorities will be entitled to access private premises and seize documents after having obtained prior authorization from the judicial authority of the respective Member State concerned in accordance with national law, if reasonable suspicion exists that such may be relevant to prove a case of insider dealing or market manipulation.
- Uniform minimum sanctions
As pecuniary sanctions for market abuse vary significantly among Member States, MAR promotes convergence of sanctions and defines minimum rules for administrative measures, sanctions and fines. This does, however, not limit Member states to impose stricter rules. Such minimum sanctions include inter alia administrative pecuniary sanctions of up to twice the amount of the profits gained or losses avoided by market abuse as well as of up to EUR 5 million for natural persons and up to 10% of a legal person's total annual turnover in the preceding business year. Further, Member States may impose 'public shaming' sanctions, that is public statements published on the competent authorities' website, indicating the person responsible and the offence committed.
- Protection and incentives for whistleblowers
Whistleblowers bring new information to the attention of competent authorities but may be deterred for fear of retaliation, or for lack of incentives.
Accordingly, MAR aims to ensure that adequate arrangements are in place to encourage whistleblowers to file reports to competent authorities, to protect them from retaliation or to provide financial incentives for whistle blowing. Whistleblowers should only be eligible for those incentives where they bring to light new information which they are not already legally obliged to notify and where this information results in a sanction.
- Directors' dealings
As regards directors' dealings the proposal of MAR clarifies that the pledging or lending of financial instruments and also transactions by another person exercising discretion for the director shall fall under the directors' dealings reporting obligation. However, in order to ensure an appropriate balance between the level of transparency and the number of directors' dealing reports, a uniform threshold of EUR 20,000 per annum will be introduced below which transactions shall not be reported.
Market Abuse Directive 2
Not all Member States have to date provided for criminal sanctions for serious breaches of national legislation implementing the Market Abuse Directive. In the opinion of the Commission criminal sanctions for market manipulation are essential in all Member States. As a consequence, the proposal of MAD2 foresees that intentional insider dealing and market manipulation should be regarded as criminal offences by Member States and therefore be subject to criminal sanctions. Likewise, inciting, aiding as well as abetting such criminal offences or attempting them shall also be punishable by Member States.
We expect MAR and MAD2 to have overall positive effects on the efficiency and transparency of capital markets in Austria. While Austrian law does already meet several provisions imposed by the MAR and MAD2 legislative framework, certain clarifications (e.g. that inside information can be abused before an issuer is under the obligation to publicly disclose it) are welcome.
The amended definition of market manipulation fortunately now covers all types of behavior that may give false or misleading signals or secure prices at artificial levels or that employ fictitious devices, deceptions or contrivances - and not only transactions or trading orders.
While the prohibition of market manipulation attempts as well as substantially increased administrative fines may help reducing insider dealings and market manipulation (attempts) in practice, it remains to be seen whether the proposed incentives for whistleblowers, in particular as regards financial incentives, are indeed adequate to support detection of market abuse.
Also, the proposed increase in scope of the market abuse regime will significantly extend EU rules to cover financial instruments listed or traded on markets outside the EU which are either also traded on an EU regulated market, MTF or OTF or related to a financial instrument traded on the former.
MAR (provisional proposal):
MAD2 (provisional proposal):