On 20 October 2011 the European Commission published formal legislative proposals intended to update and strengthen the existing framework insuring  investor protection under the Market Abuse Directive (2003/6/EC) (the "MAD"). The proposals consist of a regulation on insider dealing and market manipulation (the "Regulation") and a new directive on criminal sanctions for insider dealing and market manipulation (the "Directive"). This update gives a brief overview of the most notable proposed changes to the current European regulatory framework and their impact on the legal situation in the Netherlands.

Main Reasons for the Update

The proposed update of the MAD is intended to ensure a consistent approach to market abuse issues by regulators across the European Union and provide an updated regulatory framework in order to keep pace with market developments. The Regulation introduces prohibitions, requirements and corresponding harmonised civil and administrative sanctions and powers intended to be directly applicable in each member state. Implementation of these measures in national legislation will therefore not be necessary once the Regulation has entered into force. ESMA shall provide further technical standards for amongst others insider lists and appropriate public disclosure of inside information. Minimum criminal sanctions are set out in the Directive, which is to be implemented on a national level. The Regulation broadens and clarifies the scope of the current market abuse framework by clarifying the definitions of "market manipulation" and "insider trading" and expanding the scope of European market abuse legislation to cover transactions in financial instruments traded on MTFs or OTFs[1] and OTC transactions and in any related financial instruments traded on these markets or on a regulated market. Currently, the Netherlands Financial Supervision Act (the "NFSA") prohibits insider trading and market manipulation in relation to instruments traded on MTFs in the European Economic Area. The Regulation also clarifies which high frequency trading strategies constitute prohibited market manipulation.

The update of the MAD is further intended to reduce administrative burdens of SME issuers by providing some relief with respect to publication of inside information and providing a lighter set of rules regarding insider lists than is applicable to larger issuers.

Inside Information

The Regulation sets out a broader definition of inside information than currently included in the MAD or the NFSA. Most notably, information regarded as relevant for the making of an investment decision by a reasonable investor, who regularly deals on the market and in certain financial instruments or related spot commodity contracts, is considered inside information. It will therefore no longer be necessary that such information is "price sensitive". While this expansion of the definition of inside information will broaden the scope of what is considered "insider dealing", it will not increase the quantity of information which must be disclosed to the public, due to the fact that the Regulation provides for an exemption to the obligation to disclose inside information which is not "price sensitive". The NFSA currently provides for a uniform definition of inside information, which is used both in determining what information must be disclosed and if insider trading has occurred.

Commodity Derivatives and Emission Allowances

Although the Regulation is not intended to cover transactions and behaviour performed strictly within markets covered by specific sectoral legislation (such as REMIT), it is intended to broaden the scope of the market abuse framework to cover those spot markets which are related to and have an effect on financial and derivative markets. Therefore the Regulation provides for broadened definitions of inside information and market manipulation with respect to commodity derivatives trading.

The definition of inside information in relation to commodity derivatives will be aligned with the general definition of inside information and extended to cover price sensitive information which is relevant to the related spot commodity contract as well.

The Regulation introduces a new definition for inside information relating to emission allowances. The prohibition on insider trading will also cover emissions allowances traded in auctions and auctioned products based thereon.

Insider Dealing

The Regulation explicitly prohibits "attempts to engage in insider dealing" and clarifies that both actual cancellations and attempts to cancel transactions are considered use of inside information which constitutes insider dealing. In the Netherlands, cancellations of transactions, i.e. acts where no financial instruments where acquired or disposed of, are currently not considered insider dealing. This will change once the Regulation enters into force.   

Market Manipulation

The Regulation introduces a new definition of "attempting to engage in market manipulation". In contrast to the MAD, the Regulation no longer provides for an exemption for market manipulation which can be justified and which is performed in line with a market practice accepted by a national regulator and notified to ESMA. The recently accepted Dutch market practice for transactions performed pursuant to a liquidity enhancement agreement[2] will no longer provide an exemption to the market manipulation prohibition as set out in the NFSA and must be repealed by the Dutch legislator within twelve months after entry into force of the Regulation. Also the prohibition to manipulate the market under the Regulation is explicitly extended to cover spot commodity contracts.

Furthermore, the Regulation provides for descriptions of acts which constitute market manipulation, including specific acts performed through algorithmic trading and with respect to electronic media.

Buy-Back and Stabilisation Transactions

Transactions performed under buy-back programmes and stabilisation transactions if performed in accordance with the Regulation (and under conditions yet to be published) are exempted from the insider trading and market manipulation prohibitions. Disclosure     

The Netherlands currently does not require notification to the competent authorities if an issuer decides to delay disclosure of inside information pursuant to the NFSA. Once the Regulation enters into force delays in disclosure must be notified to the competent authority immediately after the issuer has disclosed the delayed inside information to the public, thus allowing regulators to monitor if a delay was justified.

Further Steps

The Regulation will be passed to the European Parliament and the European Council for negotiation and adoption. It is intended that the Regulation will enter into force, and the MAD will be repealed 24 months after adoption.