Eugene Eteris, BC, Copenhagen, 06.02.2014.



The European Parliament approved the Commission's proposal for a Directive on criminal sanctions for market abuse. The MEPs vote follows the political agreement reached with the Council and confirmed by COREPER in December 2013. The Directive shows the EU’s commitment to counter insider dealing and market manipulation in its financial markets through strict and effective criminal sanctions.

Unanimous decision by the tree main EU legislative institutions on the Directive (important that EP, as the last in the row, at its plenary session made a final positive vote on 4 February 2014) demonstrates Europe's commitment to counter insider dealing and market manipulation in its financial markets through strict and effective criminal sanctions. Therefore, the EU member states made a definite move that such behavior, including the manipulation of benchmarks, is a criminal offence, punishable with effective sanctions everywhere in Europe.



Background Present situation is such that investors who trade on insider information and manipulate markets by spreading false or misleading information can easily avoid sanctions by taking advantage of legal differences among the EU-28 member states. Some countries’ authorities lack effective sanctioning powers while in others there are no criminal sanctions for certain insider dealing and market manipulation offences. Effective sanctions can have a strong positive effect and reinforce the integrity of the EU’s financial markets. The European Commission already in September 2011, proposed EU-wide rules to ensure minimum criminal sanctions for insider dealing and market manipulation (see IP/11/1218). In July 2012, the Commission presented amendments to its original proposal in order to completely prohibit the manipulation of benchmarks, including LIBOR and EURIBOR, and make such manipulation a criminal offence (see IP/12/846). The Directive complements a separate proposal for a Regulation on Market Abuse, endorsed by the European Parliament on 10 September 2013 (see MEMO/13/774), which improves the existing EU legislative framework and reinforces administrative sanctions. Proposing present legislation, European Commission used new powers under the Lisbon Treaty to enforce an EU policy through criminal sanctions; it is done for the first time since the basic law came into force in December 2009. Two Commissioners, Vice-President Viviane Reding, responsible for Justice and Michel Barnier Commissioner responsible for Internal Market and Services agreed that adoption of a new Directive “sends a clear signal: there must be zero tolerance for manipulators in financial markets”.



The EU officials underlined that the new law on the market abuse framework will ensure that violators will face huge fines or jail across all EU states. Source: European Commission - MEMO/14/77 “Statement by Vice-President Reding and Commissioner Barnier on European Parliament's vote to approve criminal sanctions for market abuse directive”, 4 February 2014. In http://europa.eu/rapid/press-release_MEMO-14-77_en.htm?locale=en



Main Directive’s features The adoption of the Directive means that: There will be common EU definitions of market abuse offences such as insider dealing, unlawful disclosure of information and market manipulation;

There will be a common set of criminal sanctions including fines and imprisonment of four years for insider dealing/market manipulation and two years for unlawful disclosure of inside information;

Legal persons (companies) will be held liable for market abuses;

Member States need to establish jurisdiction for these offences if they occur in their country or the offender is a national;

Member States need to ensure that judicial and law enforcement authorities dealing with these highly complex cases are well trained. The Directive requires the EU member states to take the necessary measures to ensure that the criminal offences of insider dealing and market manipulation are subject to criminal sanctions. Member States will also be required to impose criminal sanctions for inciting, aiding and abetting market abuse, as well as for attempts to commit such offences. After publication of the Directive in the Official Journal (expected in June 2014), the EU member states will have two years to implement the Directive into the national legal systems. Reference materials: - Political agreement by the Council and COREPER see in IP/13/1299. - Commission's proposal for a Directive on criminal sanctions for market abuse, see in IP/11/1218. - MEMO/14/78 and MEMO/13/774; - European Commission, website on Market Abuse, and - http://ec.europa.eu/internal_market/securities/abuse/index_en.htm



Additional information In the additional information material concerning the new Directive, the Commission published Q&A material specifying some vital aspects of the new Directive. Below follows extracts from the Commission’s info-material.



Criminal sanctions for market abuse In recent years, financial markets have become increasingly global, giving rise to new trading platforms and technologies. This unfortunately has also led to new possibilities to manipulate these markets. During the LIBOR (London Interbank Offered Rate) scandal, serious concerns were raised about the manipulation of benchmarks, which can result in significant losses for consumers and investors or distortion of the real economy. As part of its work to make financial markets sounder and more transparent, the European Commission proposed in 2011 (with amendments in 2012) revised legislation to better tackle market abuse. This included a draft Regulation on insider dealing and market manipulation (market abuse) to update and strengthen the existing rules and a draft Directive to ensure minimum criminal sanctions for market abuse (see IP/11/1217, IP/11/1218 and IP/12/846). The new EU rules for dealing with market abuse consisting of the Directive on criminal sanctions for market abuse (adopted by the European Parliament – MEMO/14/77) and the Market Abuse Regulation (political agreement endorsed by the European Parliament on 10 September 2013 – MEMO/13/773 and MEMO/13/774). These rules strengthen and replace the previous (but the framework still in force for a couple of years, provided by the Market Abuse Directive, see 2003/6/EC), to ensure market integrity and investor protection. The new framework will ensure the EU regulation keeps pace with market developments. It will be adapted to the new market reality, notably by extending the scope to include all financial instruments, which are traded on organised platforms and over-the-counter (OTC), while adapting rules to new technology. It will strengthen the fight against market abuse across commodity and derivative markets, explicitly ban the manipulation of benchmarks, such as EURIBOR and LIBOR, and reinforce the cooperation between financial and commodity regulators. Since the sanctions currently available to supervisors often lack a deterrent effect, sanctions will be tougher and more harmonized. Source: European Commission - MEMO/14/78 “Directive on criminal sanctions for market abuse – Frequently Asked Questions”, 4 February 2014. http://europa.eu/rapid/press-release_MEMO-14-78_en.htm?locale=en



Criminal offences at EU level: definitions Insider dealing occurs when a person who has price-sensitive inside information trades in related financial instruments. Market manipulation takes place when a person artificially manipulates the price of financial instruments through practices such as the spreading of false or misleading information and conducting trades in related instruments to profit from this. Together these practices demonstrate market abuse. Investors who trade on insider information and manipulate markets by spreading false or misleading information can currently avoid sanctions by taking advantage of differences in laws between the EU states. Some countries’ authorities lack effective sanctioning powers while in others criminal sanctions are not available for insider dealing and market manipulation offences. Effective sanctions can have a strong deterrent effect and reinforce the integrity of the EU’s financial markets. This is the first legislative proposal based on the new Article 83 paragraph 2 of the Treaty on the Functioning of the European Union, which provides for the adoption of common minimum rules on criminal law when this proves essential to ensure the effective implementation of a harmonised EU policy. Current sanction regimes applied in the Member States for market abuse offences have proven not to be sufficiently effective. They do not always use the same definitions of these crimes and are too divergent, allowing perpetrators to benefit from loopholes. The Directive on criminal sanctions for market abuse follows the approach set out in the Commission's Communication "Towards an EU criminal policy – Ensuring the effective implementation of EU policies through criminal law" of 20 September 2011 (see IP/11/1049). This included an assessment, based on clear factual evidence, of the national enforcement regimes in place and the importance of common EU minimum criminal law standards, taking into account the principles of necessity, proportionality and subsidiarity. The Directive on criminal sanctions for market abuse is also part of the follow-up to the Commission's Communication on "Reinforcing sanctioning regimes in the financial services sector" of 8 December 2010 (see IP/10/1678). This envisaged the introduction of criminal sanctions for the most serious violations of financial services legislation if and where this would prove essential to ensure the effective implementation of such legislation.



Reviewing the existing Market Abuse Directive (MAD) Already in 2003, the Market Abuse Directive (2003/6/EC) introduced a framework to harmonise core concepts and rules on market abuse and strengthen cooperation between regulators. However, very soon Commission identified a number of problems, which were summarised in five sectors: · gaps in regulation of new markets, platforms and over-the-counter (OTC) trading in financial instruments; · gaps in regulation of commodities and commodity derivatives; · regulators cannot effectively enforce the MAD; · lack of legal certainty undermines the effectiveness of the MAD; and · administrative burdens, especially for small and medium-sized companies (SMEs). The regulatory framework provided in the 2003 Market Abuse Directive (2003/6/EC) had been outpaced by the growth of new trading platforms, OTC trading and new technology such as high frequency trading (HFT). Hence, the new Market Abuse Regulation (MAR) and the Directive on criminal sanctions for market abuse keep pace with market developments. These legal instruments extend the scope of existing EU legislation to financial instruments traded on multilateral trading facilities (MTFs), as well as other organised trading facilities (OTFs), so that trading on all platforms and in all financial instruments which can have impact on them will be covered by market abuse legislation. It also provides an indicative list of HFT strategies, which shall be considered as market manipulation, such as placing orders, which has the effect of disrupting or delaying the functioning of a trading system (so-called, "quote stuffing"). Commodity markets have become increasingly global and interconnected with derivative markets, leading to new possibilities for cross-border and cross-market abuse. The scope of the legislation is therefore extended to market abuse occurring across both commodity and related derivative markets. The need for a separate Directive on Criminal Sanctions for Market Abuse Minimum rules on criminal offences and on criminal sanctions for market abuse are essential for ensuring the effectiveness of the EU policy on market integrity. Criminal sanctions demonstrate social disapproval of a qualitatively different nature compared to administrative sanctions or compensation mechanisms under civil law. Besides, common minimum rules on the definition of criminal offences for the most serious market abuse offences also facilitate the cooperation of law enforcement and judicial authorities in the Union, especially considering that the offences are in many cases committed across borders.



Offences subject to criminal sanctions The Directive defines the following offences: insider dealing, recommending or inducing another person to engage in insider dealing, unlawful disclosure and market manipulation. These actions shall be regarded by the EU states as criminal offences at least when they are serious and committed intentionally. The Market Abuse Regulation excludes from the scope of criminal sanctions transactions for certain purposes: buy-backs and stabilisation programmes (if certain conditions and procedures are complied with transactions), orders or behaviours carried out in the pursuit of monetary, exchange rate and debt management policy. Some financial activities in the pursuit of specific Union's policies are excluded as well, e.g. Climate Policy, the Union's Common Agricultural and the Union's Common Fisheries Policies. The market abuse offences shall be deemed serious in cases such as those where the impact on the integrity of the market, the actual or potential profit derived or loss avoided or the level of damage caused to the market is high. Other circumstances might be taken into account: e.g. when offences committed within the framework of a criminal organisation or if the person has already committed such an offence before. Likewise, in market manipulation, if the level of alteration of the value of the financial instrument or spot commodity contract or the amount of funds originally used is high or whether the manipulation is performed by a person employed/working in the financial sector (or in a supervisory or regulatory authority). The Directive also requires EU states to criminalise inciting, aiding and abetting insider dealing, unlawful disclosure of inside information and market manipulation, as well as attempts of insider dealing and market manipulation. Liability will also be extended to legal persons, which will be punishable by effective proportionate and dissuasive criminal or non-criminal sanctions.



Levels and types of criminal sanctions The Directive requires the member states to ensure that the criminal offences defined in the Directive are punishable by criminal penalties and sanctions, which are effective, proportionate and dissuasive when they are committed intentionally and at least in serious cases. In order for the sanctions for the offences to be effective and dissuasive, maximum sanction levels of at least four years' imprisonment for market manipulation, insider dealing and recommending or inducing another person to engage in insider dealing and two years for the unlawful disclosure of inside information, are provided. Legal persons will also be punishable by effective proportionate and dissuasive criminal or non-criminal fines. This may include other sanctions such as exclusion from entitlement to public benefits or aid, temporary or permanent disqualification from carrying out of commercial activities, placing under judicial supervision, judicial winding up or temporary or permanent closure of establishments which have been used for committing the offence. A review clause requires the Commission to report to the European Parliament and Council, within four years of the Directive's entry into application, on its functioning and, if necessary, on the need to amend it. If appropriate, the report shall be accompanied by a legislative proposal.



Criminal law and administrative law sanctions The main purpose of the Commission is to force the member States to install in their national law a 'tool-box' for both administrative and criminal sanctions, which are more harmonised than today.



The Market Abuse Regulation provides, e.g., for the offences of insider dealing and market manipulation a maximum fine of €5 million for natural persons, and fines of €1 million and €500 000 for the remaining offences. However, the member states are free to impose even higher maximum administrative fines. It is essential that insider dealing and market manipulation is criminalised in all Member States when committed intentionally. A corresponding offence should figure in each national law at least for serious cases as it is now in the new Directive. Depending on their national law, Member States should then have the possibility to decide which type of sanction to impose, using, for example, the general principle of opportunity.



Legal measures tackling the abuse of benchmarks, e.g. LIBOR Since March 2011, investigations have been taking place in relation to possible manipulation of the EURIBOR and LIBOR benchmarks for interbank lending rates by a number of banks. The suspicion was that banks had provided estimates of the interest rate at which they would accept offers of funding which were different from the rate they would have accepted in practice. As a result, the integrity of the rates has been called into question – rates which are used as benchmarks for borrowing and as references for the pricing of many financial instruments such as interest rate swaps and consumer contracts such as mortgages, loans and credit cards. Furthermore, the individual contributor banks' estimates provided misleading information to the market about their likely costs of funding. In order to capture unequivocally the manipulation of benchmarks and in order to ensure that such manipulation of benchmarks is an offence, the Market Abuse Regulation and the Directive on criminal sanctions for market abuse explicitly prohibits this and subjects such manipulation to administrative and criminal sanctions.



Benchmarks on criminal sanctions against market abuse By definition, a benchmark is any rate, index or figure made available to the public or published (periodically or regularly) determined by the application of a formula to, or on the basis of the value of one or more underlying assets or prices. It can include estimated prices, actual or estimated interest rates or other values, or surveys and by reference to which the amount payable under a financial instrument or the value of a financial instrument is determined. Underlying assets or prices referenced in benchmarks can include equities (e.g. the FTSE 100 index), bonds (e.g. NASDAQ OMX fixed income), interest rates (e.g. LIBOR or EURIBOR), or commodities such as agricultural products (e.g. cocoa LIFFE London), metals (e.g. Gold COMEX) or oil (e.g. Brent oil ICE). All benchmarks, which are included in the Directive, provide that they determine the amount payable under a financial instrument. The Directive on criminal sanctions against Market Abuse require that, e.g. a member states provides sanctions for natural or legal persons transmitting false or misleading information, providing false or misleading inputs, or any action, which manipulates the calculation of a benchmark, including the manipulation of benchmarks' methodologies. Manipulation of benchmarks is a cause for concern for different reasons, e.g. many financial instruments are priced by reference to benchmarks. Any actual or attempted manipulation of important benchmarks can have a serious impact on market confidence and could result in significant losses to investors or distort the real economy. It is therefore essential to prohibit manipulation of benchmarks unequivocally, and to clarify that judicial authorities could impose criminal sanctions for the offence of market manipulation in serious cases. It is also essential that all necessary steps be taken to facilitate the detection of such manipulation by competent authorities so that they can impose sanctions; these actions are dealt with in the Market Abuse Regulation. A stringent legal framework will act as a credible deterrent to such behaviour, thereby protecting investors and restoring market confidence. As a complement to the Regulation and Directive on market abuse, the Commission adopted in September 2013 a proposal for a Regulation on Benchmarks to ensure that benchmarks are provided in a robust and transparent way based on sufficient and reliable data (see IP/13/841). This proposal will ensure high standards of governance in the provision of benchmarks, notably by tackling conflicts of interest, to reduce the opportunities and incentives for manipulation.

