Scandals regarding the manipulation of interest rates have occupied both the media and politicians in recent times. Shortly after the latest case of manipulation of LIBOR by several banks came to light, the European Commission presented measures for combating interest-rate manipulation on 25 July 2012. The Commission was able to react so swiftly because the European market abuse regime is already under review. As such, the Commission was able to draw on and expand the proposals published in October 2011 for a regulation and directive on insider dealing and market manipulation (Market Abuse Regulation – MAR – COM (2011) 651 final and Market Abuse Directive – MAD II – COM (2011) 654 final). The intention is to regulate the rules on insider dealing and market manipulation via a directly applicable regulation (MAR), thereby denying the national legislatures any leeway during implementation and ensuring Europe-wide harmonisation. The directive (MAD II) is set to contain criminal penalties for insider dealing and market manipulation.
I. Extension of the European market abuse regime to cover all trading platforms
The European market abuse regime was already extended considerably in the MAD II and MAR drafts published in October 2011. One particularly noteworthy development is the inclusion of all financial instruments which are admitted to a regulated market, multilateral trading facilities (MTFs) or organised trading facilities (OTFs).
OTFs are a new market category which is set to be introduced as part of overhauling the Markets in Financial Instruments Directive, MiFID (Directive 2004 / 39 / EC), to create MiFID II. The background to this change is the fact that the financial markets have been transformed by the emergence of new trading platforms and new products, leading to a large number of transactions taking place outside the platforms covered by MiFID, i.e. the regulated market and MTFs. To include these in the MiFID regime, all organised trading will be covered by MiFID II. OTFs are being introduced accordingly as a catch-all category, primarily for trading in financial instruments that have up to now been traded over the counter. Regulation of derivatives traded over the counter (OTC) has already been tightened up with EMIR (see the fifth and sixth edition of our Banking & Finance Update). The plan is that all derivates subject to clearing under EMIR will have to be traded via a trading facility regulated by MiFID II. OTFs will be the main platform here.
Up to now, the MAD has only covered insider dealing and market manipulation in relation to financial instruments admitted to a regulated market. All financial instruments admitted for organised trading, i.e. on one of the MiFID II trading platforms, will now fall under the prohibition of market abuse via the combination of EMIR, MiFID II and MAD II / MAR.
II. Inclusion of benchmark manipulation
The MAD II and MAR proposals have now been amended by the European Commission such that the directive and regulation will also apply to benchmarks in future. According to the definition proposed, a benchmark is any commercial index or published figure calculated by the application of a formula to the value of one or more underlying assets or prices, including estimated prices, interest rates or other values, or surveys by reference to which the amount payable under a financial instrument is determined. These include, for example, reference interest rates such as LIBOR and EURIBOR as well as commodity prices.
Manipulating and attempting to manipulate benchmarks will be included in the list of prohibited and therefore punishable market manipulations. The list of criminal offences has been widened in MAD II, which contains details of sanctions, to include corresponding actions which represent a manipulation of this kind. Determining the amount and type of the sanction is left to the Member States.
The European Commission felt compelled to amend its draft regulation and directive accordingly following the LIBOR scandal since benchmarks had not previously been covered by the drafts. This amendment therefore completes the new market manipulation regime.
Overhauling the market abuse regime is intended to create greater stability, integrity and transparency in the financial markets and boost confidence in the markets. Extending the market abuse rules to all organised markets will doubtless contribute to this, but it will also involve increased regulation and therefore higher costs, e.g. for implementing corresponding compliance systems. Raising capital on the stock and bond markets may become more difficult for small and medium-sized issuers in particular. Although the measures are currently still at the draft stage, the companies affected should engage with them now.