26 April 2012

EBF proposal for a Regulation on insider dealing and market manipulation

The report calls for a detailed framework concerning the criminal sanctions that are to be imposed to combat market manipulation.

Amendment 12 extends the scope of the regulation to financial instruments traded over the counter regardless of the instrument being admitted to trading on a regulated market. It might appear to increase legal certainty because it brings all financial instruments in scope (so you no longer have to distinguish which are traded on a public market or not). However, it means applying rules designed for public markets to private transactions in private instruments. This extension of the scope seems unwarranted and would result in all transferable securities being covered by the scope of the regulation.

Legal uncertainty is exacerbated with the addition of ‘normal functioning of the market’ in the definition of market and a set of new criteria in the list of examples of Art 8.3a, ‘creating prices at an abnormal/artificial level or causing disruption of normal functioning of the trading in commodity derivatives contracts’.

Amendment 37 concerns a new mechanism to prevent cross-venue market manipulation. The competent authority of the Member State with the most liquid market shall supervise order-book activities. For this purpose, operators shall provide order-book data through their home Member State competent authority. This new system of order-book data exchange will lead to increasing extra costs for market participants. These extra costs might ultimately be covered by investors.

The complexity of articles 17 and 17(a) makes their efficient functioning difficult. Many difficulties present significant obstacles, such as the definition of the market of reference and how to organise the sending/exchange of data. Moreover, experience with the TREM system of ESMA/CESR proves the inherent difficulty of making a system run effectively even after several years attempting to do so. Furthermore, amendment 8 gives the competent authority the power to delegate surveillance tasks. However, considering the significance of the order-book data, the regulation should clearly state whom the competent authority may share the data with in order to insure a level playing field.

Full letter

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