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Brussels, 30th May 2001

Financial services: Commission proposes Directive on insider dealing and market manipulation

The European Commission has presented a proposal for a Directive on insider dealing and market manipulation ("market abuse"). The proposal would increase standards for market integrity in the securities field throughout the EU. It is based on the principles of transparency and equal treatment of market participants and would require closer cooperation and a higher degree of exchange of information between national competent authorities than currently exists. The proposal would reduce potential inconsistencies, confusion and loopholes by establishing a basic framework for the allocation of responsibilities, enforcement and cooperation within the Community. The initiative is one of the centre pieces of the Financial Services Action Plan, and the drive to create an integrated services market by 2003. It is one of the first two proposals for Directives under the new "Lamfalussy" Stockholm format distinguishing framework principles from implementing technical details (see also IP/01/759 on prospectuses). The Commission intends to adopt technical measures to complement the framework principles established by the Directive after consulting Member States' representatives in a Securities Committee.

Internal Market Commissioner Frits Bolkestein said "This proposal represents a fundamental pillar of building an integrated European capital market by 2003. I want to enhance the integrity of European financial markets by establishing and implementing common standards against market abuse throughout Europe. This will boost investor confidence in our markets and help them to develop and grow. We must have common rules on what is allowable practice and what is not. Let me be clear: the European Union has no truck with greedy financial cheats. This proposal is an important step towards ensuring stable, transparent, integrated and efficient European markets for the benefit of every consumer and investor".

The approach of the proposal

There are two main categories of market abuse: insider dealing and market manipulation. The Insider Dealing Directive (89/592/EEC) was adopted more than a decade ago. Given the changes in financial markets and in European legislation since its adoption, the Commission has to update these provisions. Therefore, the proposal covers both insider dealing and market manipulation. This will ensure that the same framework will be applied for both categories of market abuse. Moreover, it will be administratively simpler and reduce the number of different rules and standards across the European Union.

In order to ensure that the approach of a European market abuse regime remains relevant over the next decades in rapidly changing financial markets, the proposal provides for a general definition of what constitutes market abuse.

This definition is flexible enough to ensure that new abusive practices which might emerge are adequately covered. At the same time it is sufficiently clear to provide adequate guidance for behaviour to market participants.

The scope would be related to all financial instruments admitted to trading on at least one regulated market in the European Union, including primary markets. The proposal would apply to all transactions concerning those instruments, whether those transactions are undertaken on regulated markets or elsewhere. This is to avoid unregulated markets, Alternative Trading Systems and others being used for abusive purposes concerning those financial instruments.

Market integrity can only be guaranteed with a general application of prohibitions of abusive behaviour. However, the Directive recognises that in particular circumstances and for perfectly legitimate economic reasons, exemptions (so called "safe harbours") will need to be allowed, where certain prohibitions would not apply.

Single regulatory and supervisory authority in each Member State

If the European Union is to develop integrated financial markets, there needs to be convergence (rather than divergence) in the methods of implementation and enforcement in Member States. Different sets of responsibilities and powers of national administrative authorities hinder the establishment of a fully integrated market and add to market confusion. To address this, the proposal foresees that each Member State designates a single administrative regulatory and supervisory authority with a common minimum set of responsibilities to tackle insider trading and market manipulation.

Given the increasing number of cross-border activities, European legislation will need to ensure that regulatory and supervisory authorities work effectively together to prevent, detect, investigate and prosecute market abuse. For this purpose they need to be able to rely on the assistance of and to receive relevant information from each other in good time.

In principle it is unacceptable in an integrated financial market for wrongful conduct to incur a heavy penalty in one country, a light one in another and no penalty in a third. However, under the EC Treaty, harmonising sanctions is outside the scope of Community competence. Nevertheless, it is both desirable and consistent with Community law for the proposal to set a general obligation for Member States to impose and determine the administrative and criminal sanctions to be imposed for infringement of measures pursuant to the Directive in a way that is sufficient to promote compliance with its requirements.


One of the key objectives of the Financial Services Action Plan is to enhance market integrity. The existing European legal framework to protect market integrity is incomplete :

  • At European level, there are no common provisions against market manipulation.

  • At Member States level, there is a great variety of rules dealing with market abuse.

These differences lead to competitive distortions in European financial markets. They leave investment firms and economic actors often uncertain over concepts, definitions and enforcement in each European market. Moreover, new developments are adding to these difficulties.

New products and technologies are being developed; the range of derivative products is growing; increasing numbers of new participants are entering the markets; cross-border trading is increasing; and European financial markets are beginning to link cross border far more than in the past.

Market abuse not only increases the cost of capital for companies but also harms the integrity of financial markets and public confidence in securities and derivatives trading across the board. Poor market abuse rules will dissuade new investors. Ultimately, inadequate rules could weaken the European Union's economic growth and economic policy.

For further background information, see MEMO/01/203.

The full text of the proposal is available on the Europa Website: (click on What's New)

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