COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Date: 2011-10-20
Institutions: European Commission
Subjects: discriminatory price, economic offence, financial institution, insider trading, penalty, restriction on competition, selective dissemination of information, stock-exchange transaction

EUROPEAN COMMISSION 

Brussels, 20.10.2011 
SEC(2011) 1218 final 

COMMISSION STAFF WORKING PAPER 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a 
Regulation of the  European Parliament and of the Council 
on Insider Dealing and Market Manipulation (Market Abuse) 

and 

Proposal for a 
Directive of the European Parliament and of the Council 
on Criminal Sanctions for Insider Dealing and Market Manipulation  

{COM(2011) 651 final} 
{SEC(2011) 1217 final} 

 
 
 
 
  
 
 
 
 
1. 

PROBLEM DEFINITION  

The Market Abuse Directive (MAD) aims to increase investor confidence and market 
integrity by prohibiting those who possess inside information from trading in related 
financial  instruments  ("insider  trading"),  and  by  prohibiting  the  manipulation  of 
markets  through  practices  such  as  spreading  false  information  or  rumours  and 
conducting trades which secure prices at abnormal levels ("market manipulation"). 

The MAD creates some tools to prevent and detect market abuses, like insiders' lists, 
suspicious  transaction  reports  and  the  disclosure  of  managers'  share  transactions.  It 
also  obliges  issuers  of  financial  instruments  traded  on  a  regulated  market  to  make 
public  as  soon  as  possible  inside  information  that  they  possess,  with  limited 
possibilities to delay.  

In order to promote enforcement, the Directive gives national competent authorities 
powers  to  investigate,  take  administrative  measures  and  impose  "effective, 
proportionate and dissuasive" sanctions. 

The  MAD  has  introduced  a  framework  to  harmonise  core  concepts  and  rules  on 
market abuse and strengthen cooperation between regulators. However, a number of 
problems have been identified by the Commission services and these are examined 
further below. 

1.1. 

Gaps in regulation of new markets, platforms and OTC instruments  

If a financial instrument is admitted to trading on a regulated market then any trading 
in  that  instrument  is  covered  by  the  MAD,  whether  the  trading  of  that  instrument 
occurs  on  a  multilateral  trading  facility  (MTF),  broker  electronic  system  ("crossing 
network")  or  over-the-counter  (OTC).  Further,  for  insider  dealing  (although  not  for 
market  manipulation),  the  prohibition  extends  also  to  financial  instruments  not 
admitted  to  trading  on  a  regulated  market,  but  whose  value  depends  on  such  a 
financial instrument.  

However, this focus on instruments traded on regulated markets has been overtaken 
by  market  developments.  Increased  competition  and  use  of  technology  has  led  to 
greater  use  of  MTFs  and  other  organised  trading  facilities  (such  as  crossing 
networks) to trade instruments. There has also been a growth in OTC markets. If an 
instrument  is  not  admitted  to  trading  on  a  regulated  market  but  is  only  traded  on  a 
MTF, another type of facility or OTC, it will not be covered by MAD.  

Concerns  have  also  been  expressed  that  the  increasing  fragmentation  of  trading 
across different markets may inhibit effective enforcement, and different surveillance 
standards according to the nature of the venue may create an unlevel playing field. 
Finally, the increased trend towards automated and high frequency trading (HFT) has 
raised  issues  about  how  regulators  monitor  such  trading  and  whether  MAD 
adequately captures specific strategies that may be abusive practices.  

1.2. 

Gaps in regulation of commodity and commodity derivatives markets  

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Market  abuse  may  take  place  across  markets  and  across  borders,  and  this  raises 
special  concerns  for  commodity  and  related  derivative  markets,  where  market 
integrity  and  transparency  rules  apply  to  the  derivatives  markets  but  not  to  the 
underlying markets.  

Currently,  there  is  no  obligation  in  the  MAD  for  financial  supervisors  to  take  into 
account  developments  on  physical  commodity  markets  when  monitoring  financial 
markets  for  possible  market  abuse,  or  to  cooperate  and  exchange  information  with 
regulators  of  physical  markets  in  the  EU  or  in  third  countries.  This  lack  of 
cooperation  between  physical  and  financial  market  regulators  could  undermine  the 
integrity of both physical and financial markets. 

Commodity  markets  are  not  subject  to  the  same  market  integrity  and  transparency 
rules for trading activity as financial markets. Derivatives trading which distorts the 
price  of  financial  instruments  is  prohibited.  However,  derivatives  trading  which 
distorts  the  prices  of  underlying  physical  markets,  and  trading  in  physical  markets 
which  distorts  the  prices  of  financial  instruments  are  not  covered  under  the  current 
definition of market manipulation. Regulators have expressed concern about the use 
of derivatives markets to manipulate underlying commodity markets. 

In  addition,  there  are  no  general  rules  that  specify  what  information  needs  to  be 
disclosed in commodity markets and there are concerns about a lack of transparency 
of  fundamental  commodity  market  information.  This  is  a  problem  for  investors  in 
commodity  derivatives  markets,  because  the  value  of  a  derivative  is  largely 
determined  by  the  underlying  instrument  or  commodity.  It  is  also  a  problem  for 
supervisors, who cannot monitor transactions on these markets for possible abuse. 

1.3. 

Regulators cannot effectively enforce 

First, regulators lack some of the necessary powers to detect market abuse, such as to 
receive reports about suspicious transactions in OTC derivatives, even though these 
can  be  used  for  market  abuse.  Regulators  in  some  Member  States  are  unable  to 
obtain  existing  telephone  data  records  from telecom  operators  necessary  to  provide 
evidence  for  the  investigation  and  sanctioning  of  market  abuse,  notably  for  insider 
dealing. As a result, specific market abuses subject to administrative sanctions may 
remain  undetected  and  unsanctioned.  Access  to  this  data  is  considered  an  essential 
tool for the accomplishment of the investigatory and enforcement tasks of financial 
regulators.  Some  regulators  lack  the  power  to  enter  private  premises  and  seize 
documents. In addition, regulators may be deprived from access to important primary 
information  on  suspicious  transactions  from  "whistle  blowers"  as  these  sources  of 
information  lack  incentives  and  may  not  be  sufficiently  protected.  Moreover, 
regulators  lack  the  tools  to  address  "attempts  at  market  manipulation",  where  a 
person tries but fails to manipulate the market. 

Second,  not  all  competent  authorities  have  a  full  set  of  sanctioning  powers  at  their 
disposal to ensure they can respond to all abuses with the appropriate sanction. For 
example,  in  8  Member  States,  competent  authorities  do  not  have  the  possibility  to 
withdraw  licenses  in  case  of  violations.  Furthermore,  in  some  Member  States  the 
level  of  administrative  fines  can  be  considered  low  and  insufficiently  dissuasive. 
When the gains of a market abuse offence are higher than the expected sanctions, the 
deterrent  effect  of  the  sanctions  is  undermined.  In  addition,  not  all  competent 

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authorities ensure that sanctions imposed are published, which is an important factor 
for effective enforcement. Finally, in some Member States criminal sanctions, which 
have  an  important  deterrent  effect,  are  not  available  for  certain  insider  dealing  and 
market manipulation offences. This divergence undermines the single market, leaves 
scope  for  regulatory  arbitrage  and  complicates  the  cross-border  cooperation  of  law 
enforcement authorities. 

1.4. 

Lack of clarity and legal certainty 

The  MAD  includes  certain  options  and  discretions  as  well  as  provisions  leaving 
room  for  interpretation  in  practical  application.  These  divergences  and  ambiguities 
have  resulted  in  differences  in  the  rules  applicable  in  the  Member  States.  The  De 
Larosière report has identified options and discretions as one reason for competitive 
distortions and regulatory arbitrage, thus as a hindrance for the efficient functioning 
of the single market. In particular this issue concerns the concept of accepted market 
practices (AMPs), the disclosure of inside information by issuers and the obligation 
on issuers' directors to report their dealings in financial instruments. 

1.5. 

Disproportionate administrative burdens on issuers, especially SMEs 

Concerns  have  been  expressed  that  few  SMEs  seek  to  raise  capital  on  securities 
markets in part because the initial and ongoing costs of listing outweigh the benefits, 
and that EU legislation represents a barrier to access financial markets which is too 
high  for  SMEs.  If  the  MAD  were  to  be  extended  to  MTFs  without  any  adaptation, 
SMEs  which  list  on  such  markets  would  face  higher  costs  than  currently,  as  SME 
markets  in  several  Member  States  have  an  adapted  regime  for  SMEs  to  keep  their 
costs  down.  Stakeholders  have  identified  as  particularly  problematic  in  this  regard 
the  obligations  to  disclose  price  sensitive  information,  draw  up  insider  lists  and 
disclose  managers'  transactions.  These  are  considered  to  create  significant  expense 
and administrative burdens for smaller quoted companies. 

2. 

THE BASELINE SCENARIO AND SUBSIDIARITY  

If  no  action  is  taken  at  EU  level  the  problems  defined  above  are  likely  to  remain 
without a coordinated response and to occur again in the future. The result would be 
that  certain  markets  and  transactions  would  not  be  subject  to  market  abuse  rules, 
certain  abuses  would  remain  unsanctioned  or  be  insufficiently  sanctioned,  and 
administrative  burdens  arising  from  differences  in  national  law  would  persist. 
Although  all  the  problems  outlined  above  have  important  implications  for  each 
individual Member State, their overall impact can only be fully perceived in a cross-
border  context.  This  is  because  market  abuse  can  be  carried  out  wherever  that 
instrument is listed, or over the counter, so there is a real risk of national responses to 
market  abuse  being  circumvented  or  ineffective  in  the  absence  of  EU  level  action. 
Further,  a  consistent  approach  is  essential  in  order  to  avoid  regulatory  arbitrage. 
Against this background EU action appears appropriate in terms of the principle of 
subsidiarity. 

The  principle  of  proportionality  requires  that  any  intervention  is  targeted  and  does 
not  go  beyond  what  is  necessary  to  achieve  the  objectives.  At  the  identification  of 

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alternative options, as well as throughout the analysis and comparison of options, this 
principle has been guiding the process. 

3. 

OBJECTIVES  

In light of the analysis of the problem above, the general objectives of the review of 
the Market Abuse Directive are to increase market integrity and investor protection, 
while  ensuring  a  single  rulebook  and  level  playing  field  and  increasing  the 
attractiveness of securities markets for capital raising for SMEs. 

Reaching  these  general  objectives  requires  the  realisation  of  the  following  more 
specific policy objectives: 

(1) 

(2) 

(3) 

Ensure regulation keeps pace with market developments 

Ensure effective enforcement of market abuse rules 

Enhance  the  effectiveness  of  the  market  abuse  regime  by  ensuring  greater 
clarity and legal certainty 

(4) 

Reduce administrative burdens where possible, especially for SMEs 

4. 

POLICY OPTIONS  

The  policy  options  are  grouped  according  to  the  operational  objectives  which  flow 
from the above-mentioned specific objectives. 

4.1. 

Prevent market abuse on organised markets, platforms & OTC transactions 

(1) 

Option 1 – no EU action. 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

Option 2 – extend rules on market abuse to Credit Default Swaps (CDS). 

Option 3 – extend rules on market manipulation to OTC instruments. 

Option 4 – extend market abuse rules to instruments only admitted to trading 
on MTFs. 

Option 5 – extend market abuse rules to instruments only admitted to trading 
on other trading facilities (other than MTFs). 

Option 6 – extend market abuse rules to instruments traded OTC (bilaterally). 

Option 7 – improve supervision of HFT. 

Option  8  –  improve  supervision  of  investment  firms  operating  trading 
facilities such as MTFs. 

4.2. 

Prevent market abuse on commodities and related derivatives markets 

(1) 

Option 1 - no EU action. 

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(2) 

(3) 

(4) 

(5) 

(6) 

Option  2  -  extend  the  definitions  of  inside  information  and  market 
manipulation to include commodity spot contracts. 

Option 3 - define inside information for commodity derivatives. 

Option  4  -  obligation  for  spot  market  traders  to  respond  to  information 
requests from competent authorities. 

Option  5  -  promote  international  cooperation  among  regulators  of  financial 
and physical markets. 

Option 6 - require issuers of commodity derivatives to publish price sensitive 
information. 

(7) 

Option 7 - clarify market manipulation for commodity derivatives. 

4.3. 

Ensure regulators have necessary information and powers to enforce effectively 

(1) 

Option 1 - no EU action. 

(2) 

(3) 

(4) 

(5) 

Option 2 - introduce reporting of suspicious orders and OTC transactions. 

Option 3 – prohibit attempts at market manipulation. 

Option 4 - ensure access to data and telephone records of telecommunications 
operators  to  investigate  and  sanction  market  abuse,  subject  to  a  judicial 
warrant. 

Option 5 - ensure access to private premises to seize documents to investigate 
and sanction market abuse, subject to a judicial warrant. 

(6) 

Option 6 - grant protection and incentives to whistleblowers. 

4.4. 

Ensure consistent, effective and dissuasive sanctions 

(1) 

Option 1 – no EU action. 

(2) 

(3) 

(4) 

(5) 

(6) 

Option  2  –  common  minimum  rules  for  administrative  measures  and 
sanctions. 

Option 3 - uniform administrative measures and sanctions. 

Option 4 - requirement for criminal sanctions. 

Option 5 - common minimum rules for criminal sanctions. 

Option 6 - improved enforcement of sanctions. 

4.5. 

Reduce or eliminate options and discretions 

(1) 

Option 1 - no EU action. 

(2) 

Option 2 - harmonise accepted market practices. 

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(3) 

Option 3 - remove accepted market practices and phase-out existing practices. 

4.6. 

Clarify certain key concepts  

(1) 

Option 1 – no EU action. 

(2) 

(3) 

(4) 

Option 2 - clarify conditions of delayed disclosure of inside information. 

Option 3 - reporting of delayed disclosure of inside information. 

Option  4  -  determine  conditions  of  delayed  disclosure  in  case  of  systemic 
importance. 

(5) 

Option 5 - clarify disclosure of managers' transactions. 

4.7. 

Reducing administrative burdens, especially on SMEs 

(1) 

Option 1 – no EU action. 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

Option 2 - SME regime for disclosure of inside information. 

Option 3 - SME exemption for disclosure of inside information. 

Option 4 - harmonise insiders' lists. 

Option 5 - SME exemption for insiders' lists. 

Option 6 - abolish managers' transactions reporting. 

Option 7 - harmonise managers' transactions reporting requirements with an 
increased threshold for all issuers, including SMEs. 

(8) 

Option 8 - SME regime for managers' transaction reporting. 

5. 

ASSESSMENT OF THE IMPACTS OF THE PREFERRED OPTIONS  

The different policy options were tested against the criteria of their effectiveness and 
efficiency in achieving the related objectives. The comparison of policy options lead 
to the following conclusions: 

–  Organised  markets,  platforms  &  OTC  transactions:  the  preferred  option  is  a 
combination of options 2, 3, 4, 5, 7 and 8. Combining options 4, 5 and 8 would 
ensure  a  level  playing  field  and  a  high  level  of  investor  protection  and  market 
integrity  for  financial  instruments,  irrespective  of  the  trading  venue  they  are 
admitted  to  trading  on.  Combining  options  2  and  3  would  ensure  that  market 
manipulation  of  underlying  instruments  through  OTC  derivatives  such  as  CDS 
would also be clearly prohibited. Option 7 would make it easier for regulators to 
detect and sanction manipulative practices through high frequency trading. 

–  Commodity  derivatives: the preferred option is a combination of options  3, 4, 5, 
and 7. Combined, these options will clarify existing definitions and prohibitions, 
ensuring  that  all  cross-instrument  manipulative  strategies  are  fully  in  scope,  and 

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offering a level playing field to investors. In terms of costs, hedging may become 
more  expensive  for  producers,  and  supervisors  will  need  to  invest  in  additional 
data  processing  and  monitoring  tools.  In  terms  of  benefits,  it  will  be  clear  to 
investors  which  information  they  may  expect  to  receive,  and  how  they  are  to 
conduct themselves in the derivatives markets. 

–  Regulators' powers: the preferred option is a combination of options 2, 3, 4, 5 and 
6.  Combining  these  options  will  ensure  that  regulators  have  the  appropriate 
powers  to  detect  market  abuse,  notably  by  facilitating  detection  of  suspicious 
OTC  transactions  and  orders  and  sanctioning  attempts  at  market  manipulation. 
The package will ensure that when there are reasonable grounds to suspect market 
abuse,  competent  authorities  have  powers  to  access  telephone  data  records  from 
telecom operators and to enter private premises based on safeguards, in line with 
the e-privacy directive and charter of fundamental rights. Finally, the package will 
improve detection by providing for protection from retaliation and incentives for 
whistle blowers. 

–  Sanctions:  the  preferred  option  is  a  combination  of  options  2,  4  and  6.  These 
options,  which  reinforce  each  other,  will  ensure  effective,  proportionate  and 
deterrent sanctions within the market abuse framework. In accordance with article 
83.2  of  the  Treaty  (TFEU),  the  introduction  of  a  requirement  for  criminal 
sanctions  for  insider  dealing  and  market  manipulation  offences,  as  defined  at 
Union  level,  is  considered  essential  and  proportionate  for  the  functioning  of  the 
internal market. 

–  Options  and  discretions:  the  preferred  option  is  option  3.  Implementing  this 
option  would  reduce  a  source  of  legal  uncertainty,  clarify  the  legal  framework 
applicable  and  would  be  a  step  towards  the  creation  of  a  single  rulebook  in  the 
EU. 

–  Key  concepts:  the  preferred  option  is  a  combination  of  options  3,  4  and  5.  A 
combination  of  these  options  would  ensure  greater  legal  certainty  in  respect  of 
delayed  disclosure  and  managers  transactions  while  eliminating  an  option  in  the 
Directive.  

–  SMEs/administrative burden: the preferred option is a combination of options 2, 
4, 5 and 7. These four options would comprehensively reduce the administrative 
burdens related to the issuer-related requirements of the market abuse framework, 
and  would  establish  a  specific  market  abuse  regime  for  SMEs  with  a  reduced 
administrative burden on them.  

6. 

MONITORING AND EVALUATION 

The Commission will monitor how Member States are applying the changes proposed in the 
legislative initiative on market abuse. The evaluation of the consequences of the application 
of  the  legislative  measure  could  take  place  three  years  after  the  entry  into  force  of  the 
legislative measure, in the context of a report to the Council and the Parliament. This could be 
based on data from national competent authorities on sanctions for market abuse and a report 
by ESMA on the experience gained by regulators. 

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