Monday, 24 October 2011

When the going gets tough... get tough on insider dealing and market manipulation

A few days ago the European Commission released a new proposal for a Regulation on insider dealing and market manipulation (together these practices constitute market abuse) (Getting tough on insider dealing and market manipulation). It has been mentioned a few times on this blog that the European Commission tries to contribute to the process of sanation of financial markets by recognizing and dealing with some of its issues (e.g. Shortcoming of a financial market to be healed by shortselling regulation, Cross-border debt recovery to be made easier for consumers and SMEs). One of them is an increase in the possibilities of market manipulation due to globalization of financial markets, their complexity and new technologies. Insider dealing means that a person is trading in financial instruments after having obtained possession of price-sensitive inside information in relation to those instruments. Market manipulation is understood as artificial manipulation of prices of financial instruments through practices such as spreading of false information or rumours and conducting trades in related instruments. These practices concern consumers only indirectly by influencing the stability and transparency of the financial market. However, this indirect influence can have quite a strong effect on consumers, which means this new development in European law is worth mentioning here (see also previous post on Inside Job).

The new proposal intends to strengthen investor protection already offered by the Market Abuse Directive (2003/6/EC). It extends the scope of protection to financial instruments that are only traded on new platforms (e.g. multilateral trading facilities) and over the counter as well as adapts the existing rules to new technologies (e.g. high frequency trading within which certain practices, like "quote stuffing" - i.e. submitting orders without an intention to trade but to disrupt a trading system - will be recognized as prohibited market manipulation).

"The proposal clarifies that market abuse occurring across both commodity and related derivative markets is prohibited, and reinforces cooperation between financial and commodity regulators. The proposal includes a number of measures to ensure 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."

This means that regulators will also gain the power to access phone and data traffic records from telecoms operators or to access private documents and premises (upon prior judicial warrant) where a reasonable suspicion exists of insider dealing or market manipulation. Whistleblowers will be granted protection and incentives for reporting market abuse. Also suspicious unexecuted orders and suspicious OTC transactions are to be reported. Additionally, an offence of 'attempted market manipulation' is introduced to protect the parties in the financial market from attempts to manipulated the market, where that manipulator does not succeed in actual trading practices. As far as sanctions are concerned: fines are not to be less than the profit made from market abuse, and not more than two times any such profit.

A proposal for a Directive on criminal sanctions was introduced as well, according to which, criminal sanctions will be applied for intentional offence of insider dealing and market manipulation (European Commission seeks criminal sanctions for insider dealing and market manipulation to improve deterrence and market integrity). Currently, the Member States differ in regulation of such offences which means that investors might avoid sanctions by 'forum shopping'.

For more information see FAQ about these two proposals. See also the website of The EU Single Market on Market Abuse.

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