The European
Parliament and the E.U. Council have reached agreement on legislation to
provide criminal sanctions for insider dealing and market abuse. There will be a common set of criminal sanctions
including fines and imprisonment of four years for insider dealing and market
manipulation; and two years for unlawful disclosure of inside information. The
legislation, which was proposed by the European Commission, would also prohibit the manipulation of
benchmarks, including LIBOR and EURIBOR, and make such manipulation a criminal
offense The legislation
would provide common EU definitions of
market abuse offenses such as insider dealing, unlawful disclosure of
information and market manipulation. The political agreement is due to be
confirmed by the European Parliament in plenary, expected in January 2014.
The draft Directive requires Member
States to take the necessary measures to ensure that the criminal offenses of
insider dealing and market manipulation are subject to criminal sanctions.
Member States will also be required to impose criminal sanctions for inciting,
aiding and abetting market abuse, as well as for attempts to commit such offenses.
The Directive on criminal sanctions complements a separate and new Regulation
on Market Abuse.
The Commission noted that as a result of this
legislation Member States will have to establish jurisdiction for these
offenses if they occur in their country or the offender is a national. They
will also have to ensure that judicial and law enforcement authorities dealing
with these highly complex cases are well trained.
The Market Abuse Regulation would adapt EU regulation
to the new market reality by extending its scope to financial instruments traded
on new platforms and over-the-counter, currently not covered by E.U.
legislation. The measure would clarify that market abuse occurring across both
commodity and related derivative markets is prohibited, and reinforce
cooperation between financial and commodity regulators. The Regulation includes
a number of measures to ensure that 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 measure introduces
tougher and greater harmonization of sanctions, including possible criminal
sanctions which are the subject of a separate but complementary Directive.
Commissioner for the internal Market Michel Barnier
said that offenders found guilty of market abuse will finally face jail across the
European Union. Together with the Market
Abuse Regulation, the EU has significantly strengthened the powers of Member
States to detect and severely punish
insider dealing and market manipulation. In particular, continued the
Commissioner, those who manipulate benchmarks such as Euribor will in future
face large fines or jail.
Investors who trade on insider information and
manipulate markets by spreading false or misleading information can currently
avoid sanctions by taking advantage of differences in law between the E.U.
Member States. Some countries’ authorities lack effective sanctioning powers
while in others criminal sanctions are not available for certain insider dealing
and market manipulation offenses.
Insider dealing occurs when a person who has
price-sensitive inside information trades in related financial instruments.
Market manipulation takes place when a person artificially manipulates the
prices of financial instruments through practices such as the spreading of
false or misleading information and conducting trades in related instruments to
profit from this. Together these practices are known as market abuse.
Benchmarks. Many financial instruments are priced by reference to
benchmarks. While it may be difficult or impossible for a competent authority
to prove that manipulation of a benchmark had an effect on the price of related
financial instruments, any actual or attempted manipulation of important
benchmarks can have a serious impact on
market confidence and could result in significant losses to investors or
distort the real economy.
The Commission thus feels that it is essential to
prohibit manipulation of benchmarks unequivocally, and to clarify that
competent authorities could impose administrative sanctions for the offense of
market manipulation in these cases, without the need to prove or demonstrate
incidental issues such as price effects. It is also essential that all
necessary steps be taken to prevent such manipulation and to enable and facilitate
the work of competent authorities in imposing sanctions. A stringent legal
framework will act as a credible deterrent to such behavior, thereby protecting
investors and restoring market confidence. These regulatory steps should
include criminal sanctions.
Rapporteur.
MEP Arlene McCarthy (U.K. Labor), the rapporteur for the
legislation, noted earlier that the LIBOR (London Interbank Offered Rate)
scandal was an illustration of greed and market manipulation of the worst kind:
manipulation of the most crucial interest rate in global finance, which
underpins around USD 350 trillion in derivatives and USD 10 trillion in loans.
Regulators in the E.U. and London were caught unawares, she noted, because the
existing E.U. market abuse regulations did not cover abuse of non-financial
instruments and benchmarks. As a result, the imposition of large fines and the
initial prosecution of the LIBOR scandal were carried out by the Commodity
Futures Trading Commission, with individual traders being called to prosecution
in the U.S. by the Department of Justice.
MEP McCarthy said that the litmus test of the new Market Abuse Regulation will be whether
the E.U. is able to use it to capture potential or emerging abuses and whether
they are tough enough to be a deterrent and to sanction abusive practices. Justice
in the E.U. would not be served if the E.U. had to extradite those who commit
abuses to the U.S. where they would face tougher sanctions and longer jail
sentences.
Thus, the legislation not only would close the LIBOR loophole, but
also would extend the scope of market abuse rules beyond financial instruments
to benchmarks and indices. This is particularly relevant and important, said
the MEP, amid press rumors and speculation of manipulation in energy markets.
as well as potential manipulation in foreign exchange markets.
The new rules would provide regulators with a range of tough
tools, including more severe sanctions and penalties, to monitor, detect and
prosecute market abuse.