EBF POSITION ON THE REVIEW OF THE MARKET ABUSE DIRECTIVE

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1 EBF Ref.D2000D-2011 Brussels, 19 December 2011 Launched in 1960, the European Banking Federation is the voice of the European banking sector from the European Union and European Free Trade Association countries. The EBF represents the interests of almost 5000 banks, large and small, wholesale and retail, local and cross-border financial institutions. Together, these banks account for over 80% of the total assets and deposits and some 80% of all bank loans in the EU only. EBF POSITION ON THE REVIEW OF THE MARKET ABUSE DIRECTIVE Key Points The EBF supports the fight against market abuse. The introduction of greater harmonisation in this area is particularly welcomed. However, the review of the market abuse framework has not achieved sufficient legal certainty. Many proposals remain ambiguous. This is particularly worrisome with regard to potential criminal law implications. The proposed Market Abuse Regulation (MAR) should restrict its scope to instruments admitted to trading on regulated markets, MTFs and OTFs designated by the European Securities and markets Authority (ESMA) on the basis of criteria specified in the Regulation. ESMA should coordinate, with the cooperation of national competent authorities, the creation of a consolidated list of instruments traded across all relevant EU trading facilities. The proposed definition of inside information in article 6(1)(e) and 6(3) greatly expands the range of information that could be considered as inside. Co-legislators should clarify that information would only be considered inside if it is price sensitive hence deleting article 6(1)(e). MAR should be amended to make clear that it is legitimate for a person to deal in financial instruments where the inside information does not have a material influence on the decision to deal. Furthermore, MAR should be amended to include existing defences included in the Market Abuse Directive (MAD) concerning the use of inside information. The EBF supports that the existing definition of market manipulation covers any other behaviour so long as comprehensive, indicative examples of behaviour that shall be considered as market manipulation are provided. The proposed prohibition of attempts to engage in market manipulation is supported. Explicit mention to manipulative strategies such as quote stuffing, layering and spoofing are welcomed. The Federation welcomes a degree of harmonisation with regard to the consideration of insider dealing and market manipulation as criminal offences. For more information, please contact Enrique Velázquez, Senior Adviser Financial Markets at e.velazquez@ebf-fbe.eu. EBF a.i.s.b.l ETI Registration number: , rue Montoyer B-1000 Brussels +32 (0) Phone +32 (0) Fax

2 General remarks The European banking industry supports the fight against market abuse. Insider dealing and market manipulation are harmful for investors and undermine confidence in the markets. In this regard, the Commission s proposals for a revised Market Abuse Directive (MAD II) and a new Regulation (MAR) to update the market abuse regime are a welcomed step. The introduction of greater harmonisation in the field of market abuse is particularly supported. The Federation considers that avoidance of any gaps or loopholes resulting from differences in the implementation of the rules across Member States must be avoided as much as possible. The Federation particularly observes that many of the views it expressed in its response to the European Commission s June 2010 consultation have been taken on board in the legislative proposals. Still, the Federation notes that the necessary broadening of the scope of the current regime has not been fully accompanied by adequate legal clarity and legal certainty. European banks also consider that the proposals remain ambiguous in a number of crucial instances and necessitate more clarification and supporting examples. Examples of legal uncertainty include the definition of inside information in Article 6(1)(e) and 6(3); the reference to any other behavior in Article 8 and what market abuse may mean in the context of OTC. Furthermore, as part of the proposal are set forward in the form of a regulation and may have criminal law implications as per the revised Directive, it is essential that the level of detail is sufficiently precise, especially given the breath of the rules that can be sanctioned and the potentially detrimental effect that diverging national courts interpretations may have on the aforementioned harmonisation objective. Specific remarks Scope issues The Federation supports the extension of the scope of the market abuse regime to cover financial instruments admitted to trading on multilateral trading facilities (MTFs) and the new category of organised trading facilities (OTFs), as defined in the proposals reviewing MiFID. There, are, however, two main practical implications that need to be addressed in order to make this extension workable. a) Extraterritoriality The extension of scope will significantly expand the extraterritorial reach of EU market abuse rules. Potentially MAR will apply to insider dealing or market manipulation taking place entirely outside the EU simply because the trading relates to an instrument which is admitted to trading on a trading facility in the EU. The EBF recommends that MAR should restrict its scope to instruments admitted to trading on regulated markets, MTFs and OTFs designated by ESMA on the basis of criteria 2

3 specified in the Regulation (or through implementing measures). Those criteria should include criteria designed to identify markets/venues which are significant to the price formation process in particular instruments, where the process regarding admission to trading meets the most stringent standards and where there is adequate transparency as to which instruments are traded on those markets. b) Legal certainty The extension of the scope to cover the new OTFs means that many new instruments will come within the direct scope of market abuse rules. This will make it much more difficult for market participants to identify which instruments are covered by EU market abuse rules (but they will be strictly liable for contraventions of MAR whether or not they knew or ought to have known that their conduct was within the scope of the regulation). Therefore, the EBF would support that ESMA coordinates, with the cooperation of national competent authorities, the creation of a consolidated list of instruments traded across all relevant EU trading facilities. The Federation supports the extension of the scope of the market abuse regime to cover any financial instruments traded OTC which can have an effect on the covered underlying market. The Federation, however, notes that bespoke OTC instruments do not usually have a market which can be manipulated, but are purely bilaterally traded instruments. Recent discussions around Credit Default Swaps (CDS) have furthermore shown that some bilateral trading activities that are perfectly acceptable for the markets and are even considered to enhance market efficiency might be perceived to be abusive or harmful by some policy-makers or by the wider public. Therefore, the Federation invites co-legislators to clarify what market-abusive may mean in the context of OTC derivatives trading. Insider dealing Definition of Inside Information The Federation acknowledges the Commission s effort to tackle existing divergences as to the definition of inside information in the current regime (i.e. differences in Level 1 and Level 2 texts 1 ). The Federation is concerned, however, that the proposed definition of inside information in article 6(1)(e) and 6(3) greatly expands the range of information that could be considered as inside: non-public information that a reasonable investor would regard as relevant when deciding the terms of the transaction. More worryingly is that such information does not have to be price-sensitive. This is a significant change from the current position under MAD that was not discussed at all in the Commission s consultation or impact assessment and that would lead to a disproportional broadening of the definition of inside information. 1 MAD defines inside information as non public information of a precise nature that would be likely to significantly affect the prices of relevant financial instruments. The implementing directive states that this means any information that a reasonable market participant would be likely to use as part of the basis of his investment decision. 3

4 Therefore, the EBF invites the co-legislators to clarify that information would only be considered inside if it is price sensitive. This means that Article 6(1)(e) should be deleted and made clear that Article 6(3) merely supplements Article 6(1)(a) to (d). This will have the effect that inside information must be precise, price sensitive and relevant. Legal uncertainty on use of inside information MAR maintains the prohibition in MAD that insider dealing occurs when an insider who is in possession of inside information uses that information by acquiring or disposing of, for his own account or for the account of a third party, either directly or indirectly, financial instruments to which that information relates. MAR creates an express defence for legal persons who put in place effective Chinese Walls but does not otherwise reverse the Spector Photos decision in which the European Court of justice held that it is unnecessary to prove that inside information influenced a decision to deal. This means that it is still unclear whether an offence is committed on the basis of inside information or while in possession of inside information. The EBF recommends that MAR should be amended to make clear that it is legitimate for a person to deal in financial instruments where the inside information does not have a material influence on the decision to deal. Unfortunately, with the wording to ensure in Art. 7 (7) this defence possibility for legal persons becomes ineffective. The Federation supports an explicit defence from the insider dealing prohibition where the information is not used by the individuals concerned in the dealing because it is held on the other side of effective Chinese walls. There are, however, a number of other specific circumstances where a person who has inside information should be able to deal in financial instruments. The EBF recommends that the text of MAR should be amended to include recitals equivalent the recitals in MAD [recital 18 (market makers and principal traders); recital 29 (takeovers/m&as); recital 30 (dealing on own intentions) and recital 31 (research)] and REMIT [recital 12 (own plans and strategies for trading)]. The inclusion of these recitals is necessary to allow markets to function normally. The EBF notes that the Commission s consultation on the proposed revision to MAD (June 2010) and its impact assessment do not address the deletion of the recitals. Market manipulation The EBF supports that: the existing definition of market manipulation has been broadened to cover any other behaviour -and not just transactions and orders to trade that that may give false or misleading signals or secure prices at artificial levels or that employ fictitious devices, deceptions or contrivances. This extension, however, is likely to add considerable legal uncertainty. This would be particularly problematic for intermediaries, who would be required to report suspicious behaviour by third parties to the competent authorities. Therefore, the EBF welcomes that the provided indicative examples of behaviour that shall be considered as market manipulation are complemented and that, rather 4

5 that stating that the Commission may adopt delegated acts specifying the indicators of manipulate behaviour related to false or misleading signals and to price securing, the Commission shall be mandated to do so. Legal clarity and legal certainty is absolutely crucial. attempts to engage in market manipulation are prohibited. It is a matter of course that attempts to manipulate the market must not be allowed, both in principle and in view of competent authorities experience that it is easier to prove that manipulation has been attempted rather than that is was successful. Again, there is legal uncertainty as the required mental element is unclear. Legal certainty is of the essence so, further examples and detailed rulemaking would be welcomed. the list of examples of presumed market manipulation includes cases where orders are sent to a trading venue by means of algorithmic or high frequency trading. The EBF supports explicit mentions to strategies such as quote stuffing, layering and spoofing but would like to clarify that such strategies (and others, such as momentum ignition) should be prohibited regardless of whether they are committed through high speed trading or not. Furthermore, the mentioned strategies should be defined in detail, to provide market operators the necessary legal certainty as what is (or is not) lawful behaviour. It must be borne in mind that not all kinds of algorithmic or high frequency trading give rise to market manipulation concerns. Systems for the prevention and detection of market abuse New requirements for persons professionally arranging or executing transactions to have systems in place to detect and report potential market abuse beyond the already exiting reporting requirements are likely to lead to higher volume lower quality reporting exuberance. It is unclear what supervisory benefits such reporting may provide to authorities over the existing systems. Disclosure The EBF supports the balanced approach taken by the Commission as to the disclosure obligation of inside information, exempting the new category of non-price sensitive relevant information from the obligation to inform the public as soon as possible. EBF s preferred regulatory treatment is, however, that Article 6(1)(e) is deleted. Furthermore, the EBF supports the maintenance of the delayed publication regime and considers that the obligation to the issuer to inform the competent authority of the delay immediately after the information is published is proportionate. It should be made clear how the identity of the competent authority is determined when an instrument is admitted to trading on more than one venue (or in the case of emission allowance market participants where there is no venue that has admitted the instrument to trading). ESMA should also develop technical standards on the circumstances in which delay is permitted, e.g where matters are the subject of ongoing commercial negotiation. 5

6 As regulation currently allows third parties to list products on either a regulated market or an MTF, without the involvement of the issuer, the EBF in particular welcomes that the disclosure obligation does not apply to issuers who have not approved trading of their financial instruments on an EU regulated market, MTF or OTF. Finally, the EBF considers that disclosure of inside information to any other person as a result of a legal mandate should not be considered improper. Article 7 (4) should be supplemented to include this situation. Emission allowances and commodities The EBF supports that MAR extends the market abuse rules to cover EU emissions allowances and the introduction of certain specific adjustments that are required due to the specific nature of these instruments. The EBF also supports that MAR extend the scope of the market manipulation to cover behaviour relating to underlying spot commodity contracts affecting financial instruments admitted to trading on EU facilities; and to financial instruments (whether or not traded on EU facilities) that affect any spot commodity contract. In the latter case, the Federation highlights that the provision is likely to give rise to extraterritoriality concerns (see above) and, therefore, the EBF would support that the Commission s proposal is clarified to state that only market manipulation relating financial instruments traded on EU facilities is considered. Other issues Whilst SME markets should not be exempted from the market abuse regime, the EBF considers that it is proportionate that MAR provisions on insider lists are disapplied to issuers in SME markets. Some EBF members consider that, in fact, the contribution of insider lists to the fight against market abuse is debatable and that provisions on insider lists should be waived generally. The EBF also supports in principle that MAR extends the duty to report to cover suspicious orders as well as transactions. Again, however, this is subject to full legal clarity and certainty. In their role as intermediaries, banks need to know exactly what types of orders and transactions they would be required to report, with a good degree of comfort that such orders or transactions should indeed be flagged to the competent authorities. This is also bearing in mind that intermediaries only have a partial view on the markets and often, on their clients activities, especially where clients do have market-abusive intentions. Whilst EBF supports that ESMA will ensure harmonization and coordination of rules in respect of the technical arrangements for the detection and notification of suspicious transactions, the Federation calls also for ESMA s guidance as to the definition of what constitutes suspicious orders. The provisions should also make clear that the duty to report suspicious transactions only applies to persons in the EU. In connection to the scope of the reporting obligations in relation to manager's transactions, the proposals state that managers and other persons shall ensure that the information is made public 6

7 within two business days after the day on which the transaction occurred. That may be possible for some transactions. However, in those circumstances where the manager is part of a share program in the company, the timing for the notification of the acquisition may render fulfilling with reporting duties impossible. Enforcement The EBF supports that MAR requires Member States to implement effective, proportionate and dissuasive rules on administrative measures and sanctions for breach of MAR, including maximum financial penalties leaving it to member states to decide in the national legislation or case law the appropriate level of such financial penalties. The Federation is also supportive of provisions aimed at achieving greater co-ordination between Member States on investigations and enforcement; and of provisions to protect whistleblowers. As regards pan-european harmonization of insider dealing and market manipulation as criminal offences, the Federation welcomes a degree of harmonisation across Member States and that criminals actions must be available for legal entities, as well as individuals. 7