Twice As MAD: Legislative Proposals To Amend The European Regulation Of Market Abuse

Author:Mr Barnabas Reynolds, John Adams, Azad Ali, Aatif Ahmad, Thomas Donegan, Mark Dawson, Anna Doyle, William R. Murdie, Christine Ballantyne, Nina Garnham and Mak Judge
Profession:Shearman & Sterling LLP

The European Commission has published its legislative proposal to revise the Market Abuse Directive. The proposal takes the form of a directive and a regulation. Firms and individuals will need to prepare for the expanded scope of the new measures, which seek to close gaps in European market regulation and bolster the powers of national regulators. This memorandum summarises the main proposals.


The Market Abuse Directive ("MAD")1 came into force in early 2003 and introduced a harmonised framework within the European Union to regulate insider dealing (trading while in possession of inside information) and market manipulation (behaviours such as spreading false information and conducting trades which skew prices). These practices collectively constitute "market abuse".

The legislative proposals of the European Commission (the "Commission") are intended to address various gaps and perceived weaknesses in the regulation of market abuse, acknowledging the need to reflect technological developments and the fragmentation of trading. The review of MAD is one of a number of current EU initiatives aimed at strengthening financial regulation, and will sit alongside the proposed European Market Infrastructure Regulation ("EMIR"),2 which proposes mandatory clearing and reporting of over-the-counter ("OTC") derivatives; the proposed Short Selling Regulation, which restricts certain types of short selling and credit default swaps; the Regulation on Energy Market Integrity and Transparency ("REMIT"), which establishes rules prohibiting abusive practices affecting the wholesale energy markets in the European Union; and proposed amendments3 to the Markets in Financial Instruments Directive ("MiFID"), which, among other things, will widen the regulatory perimeter for financial institutions and users of financial services.4

Under the Commission's proposals, the amended market abuse regime will address the following:

market abusive behaviour in relation to products traded on a wider range of platforms, venues and even some OTC trading; market abusive behaviour in relation to spot commodity trading; cross-market manipulation; emissions trading; ambiguities in the original MAD; attempts at abusive behaviour; and enhanced enforcement powers. The Legislative Proposal and Relationship with Other Initiatives

The Commission proposes to replace MAD with a market abuse regulation ("MAR") and to create a new directive to introduce mandatory criminal sanctions for market abuse ("CSMAD").5

An EU regulation, unlike a directive, is directly applicable in the law of member states and so does not require national implementing legislation. The MAR proposal aims to ensure a harmonised set of rules across the EU and to address certain divergences in the national legislative measures employed to implement MAD. For example, there are currently variations in member states' application and understanding of "accepted market practices", a recognised defence under MAD,6 their approach to permitting delays in disclosing inside information to the market7 and other practices endorsed by particular national regulators.8 Under MAR, administrative and regulatory sanctions will also apply for market abuse which will ensure regulatory convergence in this respect too.

CSMAD seeks to harmonise criminal sanctions for market abuse across the EU by providing for a minimum set of penalties for market abuse offences. The proposals do not aim to prevent market abuse from also being treated as an administrative offence.

These proposals were released on the same day as the proposals to revise MiFID.9 Both measures complement one another in terms of a significant widening of the business trading practices and instruments now falling within their scope and in bringing in stricter and more extensive regulations. In particular, both initiatives:

will regulate instruments traded on a Multilateral Trading Facility ("MTF") or an Organised Trading Facility ("OTF") — the new MiFID II category of trading venue — as well as certain types of OTC trading; broaden the scope of regulation to regulate the trading of emissions allowances; and reflect certain concerns associated with algorithmic or high frequency trading ("HFT"). Both MAR and MiFID II also include various proposed measures aimed at easing the regulatory burden on SMEs by removing some of the barriers arising from cross-border compliance costs for smaller firms.10

Current UK Regime

The UK currently imposes both administrative and criminal sanctions for various types of market abusive behaviour. The UK retained certain provisions11 from the pre-FSMA UK market abuse regime (hence it is "super-equivalent" to MAD or has "gold-plated" it). This has resulted in a wider definition of market abuse in the UK than that which exists in many other member states. For example, in addition to the existing species of abusive behaviour (insider dealing, market manipulation, dissemination of rumours), the UK characterises behaviour that "is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market"12 as market abuse. The UK government has announced that it will end the practice of "gold-plating" future EU directives.13 The current gold-plated provisions have been extended until 31 December 2014, to reflect the existing...

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