MAD II – Revision to the Market Abuse Directive: Latest developments



10 July 2012

The European Parliament Committee on Civil Liberties, Justice and Home Affairs (LIBE) voted in favour of the LIBE rapporteur’s draft opinion of 8 May on CSMAD. (See below; at the time of writing, the final opinion has not yet been published.)

6 July 2012

The vote to be held by the European Parliament’s Economic and Monetary Affairs Committee (ECON) on the draft reports prepared by the rapporteur on CSMAD (26 March) and MAR (20 March) was formally delayed until 20 September 2012. At the same time the forecast date for the final plenary votes on the legislation was pushed back to 19 November 2012. It was explained that this was necessary to allow for more time in which to reach a compromise on the various proposed amendments to the report.

4 July 2012

Cyprus published the programme for their Presidency of the European Council, which included an affirmation that they will work towards reaching an agreement on MAD II.

20 June 2012

The European Parliament Committee on Legal Affairs (JURI) published opinions on MAR and CSMAD. The main criticisms of the former were on the blanket exclusion of public finance activities; the proposed definition of “insider dealing”; the difficulty of proving an attempt; the proposed minimum limit for the disclosure of a manager’s own actions; the publication of offenders’ details; the financial rewards for whistleblowers; and the need to avoid the risk of overlapping criminal and administrative penalties. The CSMAD opinion added that there should be greater clarity on when offences apply to legal persons as well; and that the criminal liability of legal persons should be subject to the provisions of national law on that point.

19 June 2012

The House of Commons held a debate on CSMAD brought by the European Scrutiny Committee. Members of the Committee argued that it was inappropriate for the EU (as opposed to Parliament) to legislate on market abuse, given that the vast majority of EU financial activity takes place in London. Further concerns were also raised over allowing the ECJ to adjudicate on criminal matters. Other members complained about how long the legislative process was taking. Finally it was questioned why the UK need opt in to the criminal sanctions directive given that much of it is already covered by the relatively strict FSA market abuse regime. The debate ended with an affirmation of the Government’s policy of waiting on the outcome of MAR and MiFID II before deciding whether to opt in to CSMAD.

30 May 2012

The European Parliament Committee on the Environment, Food Health and Public Safety (ENVI) published an opinion on MAR. They proposed amendments concerning emissions trading, in particular that the obligation to disclose inside information is moved from the issuer (in practice, a public body such as the EC) to the market participants themselves.

8 May 2012

LIBE published a draft opinion on CSMAD. Their amendments included more detailed definitions of offences; expressly stated minimum criminal sanctions; and the need to guard against overlapping criminal and administrative penalties.

2 May 2012

The Danish Presidency of the Council of the European Union issued a compromise proposal on MAR. This reverted to a 24 month implementation period, albeit with some provisions having immediate effect.

26 April 2012

The European Securities and Markets Authority (ESMA) published a report on the use of criminal and administrative sanctions by EU national regulators under the existing MAD legislation. The report compares Member States market abuse regimes across a variety of indicators.

The Council for the European Union (CEU) held a debate on CSMAD, reaching a “partial general approach” to the legislation. They noted that further progress on CSMAD would depend in turn on progress being made on MAR.

12 April 2012

The Financial Markets Law Committee (FMLC) produced a report on CSMAD and MAR (see below).

26 March 2012

ECON published a draft report on CSMAD. The rapporteur proposed an amendment to reduce the timeframe in which the new regime should come into force from 24 months to 12.

22 March 2012

The ECB published an opinion on CSMAD and MAR (see below).

20 March 2012

ECON published a draft report on MAR (see below).

20 February 2012

Financial Secretary to the Treasury Mark Hoban announced that the UK Government would not be opting in to CSMAD, at least in the immediate future (see below).

20 October 2011

The European Commission published their MAD II proposals (MAR and CSMAD).

Next Steps

The ECON and plenary votes on MAD II have recently been delayed; at the time of writing the current forecast is for the ECON vote to take place on 20 September 2012 and the final vote in plenary on 19 November 2012.

European Parliament Economics and Monetary Affairs Committee Draft Report

On 20 March 2012 Arlene McCarthy MEP, ECON rapporteur, presented her draft report on the new Market Abuse Regulation (MAR). Her main observations were:

(1) That the regulation of Organised Trading Facilities (OTF) be removed from the MAD II proposals. The report considered OTFs too ill-defined, and that regulation thereof would lead to further complexity and market fragmentation that would ultimately make the market even more difficult to regulate.

(2) Criticism of the Commission’s plan to lower the administrative burden for SMEs by reducing their regulation requirements. Ms McCarthy complained that “there are small ‘financial boutiques’ with less than 10 employees with a turnover of billions of euros” and warned that “SMEs that are financial players should play by the rules and principles, to protect investors.”

(3) That cross-border collaboration and exchange of information between authorities should be made mandatory.

European Central Bank Response

Following the request of the European Council, the ECB provided its response to the Commission proposals. They broadly welcomed the proposed changes to the legislation with little further comment. Its only additions were:

(1) An emphasis on the need for strict monitoring of High Frequency Trading and automatic, algorithm-based trading in general;

(2) An express role for central banks in deciding what amounts to information of “systemic importance,” which a party may be allowed (or even obliged) to withhold from the market.

The ECB also expressed a general concern over the criminal sanctions Directive, noting that some member states did not yet acknowledge the criminal liability of legal persons.

HM Treasury Response

In a ministerial statement dated 21 February 2012, Financial Secretary to the Treasury Mark Hoban announced that the UK Government would not be opting in to the criminal sanctions Directive that accompanied the MAD revisions (CSMAD) – at least not in the immediate future.

As CMSAD would mark the first use of the powers created by the Lisbon Treaty to enforce EU policy through criminal sanctions, it is expected to be a politically sensitive issue.

The Treasury, however, were clear that their objections were to do with “sequencing” rather than substance; because the provisions of CSMAD are dependent on those of the proposed Market Abuse Regulation (MAR) – still under discussion in the European Parliament – the Government would wait on the outcome of the latter before deciding whether to opt in to CSMAD. In the meantime the UK would be participating fully in the accompanying negotiations and hoped, ultimately, to implement CSMAD into law.

In his statement Mr Hoban added that the UK law on market abuse, in any case, covers all the relevant offences already - and in many ways goes further, criminalising reckless as well as intentional conduct.

Financial Markets Law Committee Response

The independent FMLC were more negative in their report of 12 April.

The Committee feared that the amended definition of “insider trading” in MAD II, far from providing the additional clarity desired, would instead “give rise to substantial uncertainty”.

The repercussions of this could be a “chilling effect on the dissemination of information and the readiness of market participants to take investment decisions”, as confused investors opt to avoid making investments where they possess any sort of “relevant information”, for fear of falling foul of insider trading law.

The lack of an objective test (such as in the UK’s Financial Services and Markets Act) where proscribed behaviour must be such as “would be … regarded by a regular user of the market as behaviour that would distort … the market” was singled out as a particular flaw in the proposals.