Market Abuse Directive: what the EC did wrong

Author: Gemma Varriale | Published: 25 Jan 2012
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Proposed changes to the market abuse regime may have a far-reaching impact, beyond what even the European Commission had in mind when it drafted the legislation.

In the Market Abuse Directive (MAD), the EC has proposed widening the categories of information that would qualify as inside information.

“It’s possible that those drafting it weren’t aware of all the practical consequences that expanding the scope of the legislation to this extent would have,” said Lucy Frew of Gide Loyrette Nouel’s London practice.

The European Banking Federation (EBF), one of the most powerful industry bodies in Europe, added its voice to the debate this month, saying that many of the EC’s proposals to create greater harmonisation in the fight against market abuse are ambiguous.

According to the EBF, the widening of the definition of inside information is disproportionate. It recommends that the definition reflects that inside information should be price sensitive in nature.

“Some of the proposed changes, if implemented in their current form, have the potential to fundamentally change liability for market abuse across Europe, the functioning of European trading venues, and the behaviour of corporates whose securities are traded on those venues,” said Karen Anderson of Herbert Smith in London.

The limited nature of the express defences in the Market Abuse Regulation (MAR) is also among the key concerns to the practical operation of the EC’s proposed new regime.

“Because of the way in which the ECJ approached its analysis in Spector Photo, the removal of key recitals presents a potentially significant issue that may not have been fully anticipated,” added Anderson.

Some believe that the removal of the recitals suggests an intention that they should no longer be relied on.

“If that is not the case, there should be no objection to the restitution of these recitals in the regulation,” added Anderson.

Criminal liability

The widening of the definition of what constitutes an offence would make it much easier to bring a criminal prosecution and to prove inside knowledge.

According to Anderson, the point that the EBF makes about the practical difficulty for market participants in identifying which securities come under this market abuse rule is valid.

Market participants will be liable for contraventions of the Market Abuse Regulation (MAR) even though they may not have realised that their conduct was caught by it.

In the paper, published on January 4, the EBF called for a full list to be created of all financial instruments to which the new rules will apply. The issue is, how to manage this list. Esma is relying on knowing and being able to publish almost immediately when an instrument is traded for the first time on an OTF. The OTF operator may not even know that instantly.

Most people believe there will be at least some tweaking around the edges of MAR. But the real question with the EC’s proposals is: if the intention was not to change the fundamentals of the insider dealing offence, then why was the regulation drafted in this way?

Click here for a link to the full EBF text