Wednesday, December 25, 2013

E.U. Parliament and Council Reach Deal on Legislative Package Criminalizing Insider Trading and Market Manipulation

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.

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