In recent years, financial markets have become increasingly global, giving rise to new trading platforms and technologies. Unfortunately, this has also led to new possibilities to manipulate these markets.

As part of its work to make financial markets more sound and transparent, this week the European Commission adopted a proposal for a regulation on insider dealing and market manipulation (ie market abuse).

The proposal aims to update and strengthen the existing framework to ensure market integrity and investor protection provided by the Market Abuse Directive.

The new framework will ensure regulation keeps pace with market developments, will strengthen the fight against market abuse across commodity and related derivative markets, reinforce the investigative and sanctioning powers of regulators and reduce administrative burdens on small and medium-sized issuers.

According to Internal Market and Services Commissioner Michel Barnier: “Market abuse is not a victimless offence. By distorting market prices, insider dealing and market manipulation undermine investor confidence and market integrity. By extending and reinforcing our legislative framework, as well as toughening up the powers and sanctions available to regulators, today’s proposals will equip them with the tools to keep markets clean and transparent.”

Insider dealing consists of a person trading in financial instruments when in possession of price-sensitive inside information in relation to those instruments. Market manipulation occurs when a person artificially manipulates the prices of financial instruments through practices such as the spreading of false information or rumours and conducting trades in related instruments.

Together, these practices are known as market abuse.

The proposal seeks to adapt EU rules to the new market reality, notably by extending their scope to financial instruments only traded on new platforms and over the counter (OTC), currently not covered by EU legislation, and adapting rules to new technology.

The proposal clarifies the fact that market abuse occurring across both commodity and related derivative markets is prohibited, and reinforces cooperation between financial and commodity regulators. It includes a number of measures to ensure that regulators have access to the information they need to detect and sanction market abuse. Since the sanctions currently available to regulators often lack a deterrent effect, the proposal introduces tougher and greater harmonisation of sanctions, including possible criminal sanctions which are the subject of a separate but complementary proposal.

To address concerns that the costs of EU legislation represent a barrier to accessing financial markets which is too high for small and medium-sized issuers, the proposal also tailors the rules for SME issuers in several respects.

The proposal now passes to the European Parliament and the Council for negotiation and adoption. Once adopted, the regulation would apply from 24 months after its coming into force.

The objectives

Keeping pace with market developments

The regulatory framework provided by the original Market Abuse Directive has been outpaced by the growth of new trading platforms, OTC trading and new technology such as high frequency trading (HFT). The proposal extends the scope of existing EU legislation to financial instruments only traded on multilateral trading facilities (MTFs), other organised trading facilities (OTFs) and OTC, so that trading on all platforms and of all financial instruments which can impact them will now be covered by market abuse legislation. It also clarifies which HFT strategies constitute prohibited market manipulation, such as submitting orders without an intention to trade but to disrupt a trading system (“quote stuffing”). Commodity markets have become increasingly global and interconnected with derivative markets, leading to new possibilities for cross-border and cross-market abuse. The scope of the legislation is therefore extended to market abuse occurring across both commodity and related derivative markets.

Reinforcing regulators’

investigative and sanctioning powers

The proposal extends the current reporting of suspicious transactions to include suspicious unexecuted orders and suspicious OTC transactions. It grants regulators the power to obtain telephone and data traffic records from telecoms operators or to access private documents or premises where there is a reasonable suspicion of insider dealing or market manipulation. A prior judicial warrant is also required for access to private premises. It also requires member states to provide for the protection of whistleblowers and sets common rules where incentives are offered for reporting market abuse. Finally, a new offence of “attempted market manipulation” is being introduced to make it possible for regulators to impose a sanction in cases where there is an attempt to manipulate the market that does not succeed in actually trading.

Common principles are proposed, notably that 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 two times any such profit. In parallel, a proposal for a directive on criminal sanctions for market abuse requires member states to introduce criminal sanctions for the offences of insider dealing and market manipulation where these are committed intentionally.

Reducing administrative

burdens on SME issuers

The disclosure requirements for issuers on SME markets will be adapted to their needs, and issuers on such markets will be exempt from the requirement to draw up lists of insiders, unless the supervisor demands otherwise. The threshold for the reporting of managers’ transactions will also be raised.