ABBL

The MAD introduced a framework to harmonise core concepts and rules on market abuse and strengthen cooperation between regulators. However, a number of problems have been identified by the Commission and these can be broadly categorised in five groups:

- gaps in regulation of new markets, platforms and over-the-counter (OTC) trading in financial instruments
- gaps in regulation of commodities and commodity derivatives
- regulators cannot effectively enforce the MAD
- lack of legal certainty undermines the effectiveness of the MAD, and administrative burdens, especially for small and medium-sized companies (SMEs).

This is why the Commission has adopted proposals to replace the MAD with a Regulation on Market Abuse (MAR) and a Directive on criminal sanctions for market abuse. Proposal for a Market Abuse Regulation (MAR.



MEMO/11/715  - 20 October 2011 - European Commission

Together, MAD and MiFID guarantee the competitiveness, efficiency and integrity of EU financial markets. They need to be updated in tandem to ensure that they are fully coherent and support each other's objectives and principles. Moreover, the pan-EU competition facilitated by MiFID has given rise to new challenges in terms of cross-border supervision. Harmonisation of the rules and competent authorities' powers is a necessary step.

The importance of market integrity has also been highlighted by the current global economic and financial crisis. In this context, the Group of Twenty (G20) agreed to strengthen financial supervision and regulation and to build a framework of internationally agreed high standards. In line with the G20 findings, the report by the High-Level Group on Financial Supervision in the EU recommended that "a sound prudential and conduct of business framework for the financial sector must rest on strong supervisory and sanctioning regimes".

The importance of the efficient functioning of the MAD was underlined in the Commission Communication "Driving European recovery", which intends to tackle the most important shortcomings in the markets that have been observed in the current financial crisis. In its Communication on "Ensuring efficient, safe and sound derivatives markets: Future policy actions", the Commission said it would extend MAD’s relevant provisions to comprehensively cover derivatives markets.

The importance of efficient coverage of OTC transactions in derivatives has been stressed also in discussions at various international fora including the G20 and the International Organisation of Securities Commissions as well as in the recent US Treasury Financial Regulatory Reform programme.



MEMO/11/715  - 20 October 2011 - European Commission

Commodity spot markets and related derivative markets are highly interconnected and market abuse may take place across these markets. This raises special concerns for spot markets because transparency rules and market integrity apply to derivatives markets but not to the related spot markets. It is beyond the scope of the Regulation to govern directly those non-financial markets, which should be subject to specific and sectoral regulation and supervision as provided for in the field of energy by the recently adopted European Parliament and Council Regulation on energy market integrity and transparency (REMIT). However, the lack of a clear and binding definition under the existing MAD of inside information in relation to commodity derivatives markets may allow information asymmetries in connection with those related spot markets. This means that under the current market abuse framework, investors in commodity derivatives may be less protected than investors in derivatives of financial markets.

Therefore, since a person can benefit from inside information in a spot market by trading on a financial market, the proposal for a regulation on market abuse aligns the definition of inside information in relation to commodity derivatives to the general definition of inside information, by extending it to price sensitive information which is relevant to the related spot commodity contract as well as to the derivative itself. This will ensure legal certainty and better information for investors.

Moreover, the MAD only prohibits any manipulation which distorts the price of financial instruments. As certain transactions in the derivatives markets can also be used to manipulate the price of the related spot markets, and transactions in the spot markets can be used to manipulate derivatives markets, the definition of market manipulation is extended in the Regulation to also capture these types of cross-market manipulation.

The Regulation also introduces an obligation to cooperate and exchange information between financial regulators and the regulators of spot commodity markets where they exist to ensure a consolidated overview of financial and spot markets and to detect and sanction cross-market and cross-border abuses. It gives financial regulators the power to require that data on spot markets be submitted directly to them in a specified format.



MEMO/11/715  - 20 October 2011 - European Commission

The proposal includes a number of measures to ensure regulators have access to the information they need to detect and sanction market abuse. The proposal extends suspicious transaction reporting to orders and to OTC transactions.

It clarifies that regulators can obtain existing telephone and data traffic records from telecoms operators where there is a reasonable suspicion of insider dealing or market manipulation (as defined in the proposal for a Directive) in violation of the Regulation or the Directive. It also grants competent authorities access to private documents or premises where there is a reasonable suspicion of insider dealing or market manipulation (as defined in the Directive) in violation of the Regulation or the Directive, subject to a judicial warrant.

It also requires Member States to provide for the protection of whistleblowers and sets common rules where incentives are provided to them for reporting information about market abuse. Finally a new offence of "attempted market manipulation" is introduced to make it possible for regulators to impose a sanction in cases where someone tries to manipulate the market but does not succeed in actually trading.



MEMO/11/715  - 20 October 2011 - European Commission

Insiders' lists are an important tool for competent authorities when investigating possible market abuse. However, differences in national laws implementing the MAD have imposed unnecessary administrative burdens on issuers. The Regulation aims to eliminate these by providing that the precise data to be included in such lists should be defined in delegated acts and implementing technical standards adopted by the Commission.

Applying the new market abuse framework of the Regulation in an undifferentiated manner to all SME growth markets may deter issuers on those markets from raising capital on the capital markets. Without prejudice to the objectives of preserving the integrity and transparency of financial markets and of protecting investors, the proposal therefore adapts the market abuse framework to the characteristics and needs of issuers whose financial instruments are admitted to trading on SME growth markets. The scope and size of the business of those issuers is more restricted and the events giving rise to the need to disclose inside information are typically more limited than those of larger issuers. The Regulation therefore requires those issuers to disclose inside information in a modified and simplified market-specific way. Such inside information may be published by those SME growth markets, on behalf of those issuers, in accordance with a standardised content and format defined in implementing technical standards adopted by the Commission. Those issuers are also exempt, under certain conditions, from the obligation to keep and constantly update insiders' lists.

The Regulation clarifies the scope of the reporting obligations in relation to managers' transactions. These reports serve important purposes by deterring managers from insider trading and providing useful information to the market about the manager's view on the price movements of the shares of the issuers. The Regulation clarifies that any transaction made by a person exercising discretion on behalf of a manager of an issuer or whereby the manager pledges or lends his shares must also be reported to the competent authorities and be made accessible to the public. Moreover, it introduces a threshold of €20 000, uniform in all Member States, which triggers the obligation to report such manager's transactions. This higher threshold will contribute also to reducing the administrative burden on SMEs.



MEMO/11/715  - 20 October 2011 - European Commission