Brussels, 30th May 2001
The Market Abuse Directive - Frequently Asked Questions (see also IP/01/758)
What is market abuse ?
Market abuse arises in circumstances where investors have been unreasonably disadvantaged by others who:
Why is a Directive on market abuse needed?
The existing European legal framework to protect market integrity is incomplete:
These differences lead to competitive distortions in European financial markets. They often leave investment firms and economic actors 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.
The aim of the Directive is to ensure the integrity of European financial markets, to establish and implement common standards against market abuse throughout Europe, and to enhance investor confidence in these markets.
Why a single Directive covering both 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 Directive needs to be updated.
Moreover, competent authorities in charge of the two different categories of market abuse (insider dealing and market manipulation) should be, and are often already today, the same. Both categories of market abuse harm the integrity of the market and they are closely related.
Therefore, the same framework for allocation of responsibilities, enforcement and co-operation over both forms of market abuse has to be ensured for competent authorities.
Furthermore, a single Directive will be administratively simpler and reduce the number of different rules and standards across the European Union.
What is the proposed Directive based on?
For the provisions relating to insider dealing, the main lines of the existing Insider Dealing Directive were essentially sound, even if the provisions had to be updated.
For market manipulation, the International Organization of Securities Commissions (IOSCO) published a document in May 2000 entitled 'Investigating and Prosecuting Market Manipulation, Report by the Technical Committee'. It was helpful to take this world wide comprehensive document into account for preparing the provisions of the Market Abuse Directive, which is addressing a global problem.
The proposed Market Abuse Directive also takes into account the Forum of European Securities Commissions (FESCO) document published in September 2000 entitled "Market Abuse: FESCO's response to the call for views from the Securities Regulators under the EU's Action Plan for Financial Services". This document was another base to be taken into account for preparing the provisions of.
Moreover, the proposal takes account of discussions with European practitioners, both regulators and members of the industry at a series of meetings organised in 1999 and 2000.
In this way, the Commission has taken into consideration real situations experienced and presented by market practitioners.
Why is it necessary to follow up the framework rules in the Directive with technical provisions adopted by the Commission?
The Market Abuse Directive follows the approach proposed by the Committee of Wise Men (chaired by Mr. Lamfalussy) in February 2001 and endorsed in a Resolution of the Stockholm European Council in March 2001.
This approach is based on differentiating framework principles from implementing measures. For the Market Abuse Directive, this means that all the key rules, basic concepts and principles are laid down in the Directive. In addition, to guarantee a permanent and harmonised level of market integrity standards throughout Europe, the Commission intends to adopt technical measures in 5 specific areas after consulting Member States' representatives in a Securities Committee. .
These 5 areas are clarification of definitions; updating of financial Instruments covered; clarification of fair disclosure of information; technical details of transactions exempted from the prohibitions of market abuse; technical modalities of co-operation between competent authorities.
Why do the proposed rules on insider dealing and market manipulation not prohibit trading in own shares in 'buy back' programmes and stabilisation?
There are legitimate economic reasons for trading in own shares in 'buy back' programmes. Such 'buy back' programmes can be a way to improve the dividend per share for shareholders. Trading in own shares can also be used to strengthen the equity capital of issuers and so would be in investors' interest.
There are also legitimate economic reasons for stabilising a security. Stabilisation in the first days of an Initial Public Offer is a way to avoid a drop in the price of this security, which could occur because of the lack of significant secondary market yet (the number of persons buying and selling this security is not high yet). Consequently, in case of unbalance between buyers and sellers, stabilisation of the security contributes to sustain the price.
However, trading in own shares in 'buy back' programmes and stabilisation would not benefit from a blanket exemption: trading would have to be carried out under agreed conditions the scope of which is to be determined during the course of adoption of the technical measures by the Commission in consultation with the Securities Committee. These conditions would constitute safe harbours to prevent issuers or intermediaries from using these exemptions for abusive purpose. The conditions for trading could be transparency rules; restrictions on time periods during which trading could be considered as legitimate to avoid the risk of insider dealing (e.g. restrictions before the public release of financial statements); daily volume limits for trading to avoid the risk of market manipulation.
Why would the designation of a single competent administrative authority by each Member State be an improvement?
The idea of a single competent authority is particularly intended to improve the efficiency of cross-border exchanges of information and investigations, which is in practice needed to face the explosion of cross-border trading. Currently, cross-border exchanges of information and investigations still need to be improved, since in some Member States, competent authorities have very limited powers of investigation, or because these powers are split between different authorities at the national level.
The administrative nature of the single competent authority is necessary to ensure its independence from the markets and to avoid conflicts of interest. However, this should not prevent from delegating some powers or functions to exchanges, under the condition that the ultimate responsibility for ensuring respect of market integrity rests with the single competent authority.