Agenda               • Foundation of the Directive and main scopes                 • Harmonization level                 •...
Introduction            Core section             Conclusion   Background of the Directive 2003/6/EC• The Commission’s Fina...
FRAMEWORK PRINCIPLES    [L1]  Directive 2003/6/EC    IMPLEMENTING MEASURES        [L2]  Directives:          -2003/124/E...
Introduction                 Core section         Conclusion                        The Market Abuse Directive            ...
Introduction           Core section             Conclusion     Harmonization level of the Directive                       ...
Introduction             Core section                Conclusion     Values pursued by the Directive (cont’d) “2) An integr...
Introduction                             Core section                      Conclusion                                     ...
Introduction                             Core section   Conclusion                  What is Market manipulation?  "Manipul...
Introduction                            Core section   Conclusion       Market manipulation according to the              ...
Introduction               Core section              Conclusion          1. Transaction - based manipulation          a. F...
Introduction        Core section          Conclusion         1. Transaction - based manipulation       a. False/ misleadin...
Introduction         Core section             Conclusion         1. Transaction - based manipulation       a. False/ misle...
Introduction                Core section                  Conclusion          1. Transaction - based manipulation      b. ...
Introduction               Core section   Conclusion     1. Transaction - based manipulation   b. Price positioning (unles...
Introduction                 Core section   Conclusion     1. Transaction - based manipulation   b. Price positioning (unl...
Introduction                Core section                   Conclusion          1. Transaction - based manipulation c. Tran...
Introduction           Core section                Conclusion         1. Transaction - based manipulation c. Transactions ...
Introduction           Core section                Conclusion         1. Transaction - based manipulation c. Transactions ...
Introduction               Core section                 Conclusion          2. Information - based manipulation a. Dissemi...
Introduction           Core section              Conclusion        2. Information - based manipulation a. Dissemination of...
Introduction           Core section              Conclusion        2. Information - based manipulation a. Dissemination of...
Introduction           Core section              Conclusion        2. Information - based manipulation a. Dissemination of...
Introduction           Core section              Conclusion        2. Information - based manipulation a. Dissemination of...
Introduction                 Core section          Conclusion     2. Information - based manipulationa. Dissemination of f...
Introduction          Core section        Conclusion                       Exceptions                  Accepted Market Pra...
Introduction                 Core section                     Conclusion       Accepted Market Practices (AMPs)Article 1.2...
Introduction              Core section                 Conclusion                        Safe HarborsArticle 8 of MAD: “Th...
Introduction                 Core section      Conclusion                  Common interest (1)Article 7 of MAD: “This Dire...
Introduction                  Core section   Conclusion                   Common interest (2)•Finally, it was decided that...
Introduction                            Core section               Conclusion     Possible Signals of Market Manipulation ...
Introduction                            Core section           Conclusion     Possible Signals of Market Manipulation     ...
Introduction                                 Core section                                  ConclusionG e n e ra l C o m m ...
Introduction                                    Core section                        Conclusion This attitude emerge       ...
Introduction                          Core section               Conclusion                                         Is it ...
Introduction                      Core section                       ConclusionBibliography•   AVGOUELAS, The emerging EU ...
Introduction                 Core section                      Conclusion  BibliographyDIRECTIVES:          Regulation:   ...
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Market abuse directive and market manipulation
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Market abuse directive and market manipulation

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Market abuse directive and market manipulation

  1. 1. Agenda • Foundation of the Directive and main scopes • Harmonization level • Economic rationaleIntroduction • Tools used • Inside the market manipulation possible abuses • What kind of abuses are possible? Are there any exceptions? • Some useful examples • Factors and signals suggested by CESR (ESMA) • Sanctions and controlsCore section • Where is the “intention”? Dual system penalties process? • Comments on the Directive body and structure • BibliographyConclusion 2
  2. 2. Introduction Core section Conclusion Background of the Directive 2003/6/EC• The Commission’s Financial Services Action Plan in 1999 has clearly stated as a priority of the EU legislation the need for a new set of rules to better match the most recent market evolution• The new Directive compared with the IDD (Insider Dealing Directive) has a wider scope and aims at strengthening the regulatory enforcements• The EU has developed an innovative set of rules to define and regulate the market abuse using the USA common law experience• The Lamfalussy Report on the Regulation of European Securities has defined the modus operandi to form regulation 3
  3. 3. FRAMEWORK PRINCIPLES [L1]  Directive 2003/6/EC IMPLEMENTING MEASURES [L2]  Directives: -2003/124/EC - 2003/125/EC - 2004/72/EC - 2004/109/EC  Regulation EC 2273/2003IMPLEMENTATION AND CONVERGENCE [L3]  CESR -02-089d - 04-505b4
  4. 4. Introduction Core section Conclusion The Market Abuse Directive [L1] Art 5 “Member States shall prohibit any person from engaging market manipulation” • The Directive 2003/6/EC recognized market manipulation as a criminal offence for the first time • The CESR involvement has been active and has been focusing on providing guidelines useful to better understand the underlying hypotheses and aims • Present development and some empirical evidence shown by recent CESR surveys are suggesting to reform the DirectiveDirective 2003/6/EC 5
  5. 5. Introduction Core section Conclusion Harmonization level of the Directive [L1] “Whereas: 1) A genuine Single Market for financial services is crucial for economic growth and job creation in the Community.” • The first reference made by the Directive is on the need of maximum harmonization • The position given to such statement shows the great importance attributed by the Commission to overcoming the divergences of national regulations • Many scholars motivate the importance of maximum harmonization with the subsidiary principle which ensures a reduction of transaction costsDirective 2003/6/EC 6
  6. 6. Introduction Core section Conclusion Values pursued by the Directive (cont’d) “2) An integrated and efficient financial market requires market integrity. The smooth functioning of securities markets and public confidence in markets are prerequisites for economic growth and wealth. Market abuse harms the integrity of financial markets and public confidence in securities and derivatives.” • Those consideration came out from CESR and the Consultation Working Group papers based on the description of some distortions showed in the futures and commodity markets • As the comments show, there is a direct reference to the necessity to ensure market efficiency and integrity, which are considered key elements to ensure economic growth and prosperityDirective 2003/6/EC 7
  7. 7. Introduction Core section Conclusion Dir. No. 2003/6/EC - Article 9 - This Directive shall apply to any financial instrument admitted to trading on a MAD regulated market in at least one Member State(…) irrespective of whether or not the transaction itself actually takes place on that market Main goals Market of the EU are: High market efficiency transparency economic growth and integrity and employment Guidelines to be followed by market Administrative supervisors to and penal sanctions set up proceduresThe European Market Abuse Directive. Ferrarini 8
  8. 8. Introduction Core section Conclusion What is Market manipulation? "Manipulation is difficult to define, but manipulative practices and schemes are usually readily identifiable” There is no generally accepted definition of the term market manipulation. Although manipulation is prohibited under a number of statutes in overseas jurisdictions, it tends not to be defined precisely.Vivien Goldwasser, Stock Market Manipulationand Short Selling. Centre for Corporate Law and 9Securities Regulation, 1999, 154
  9. 9. Introduction Core section Conclusion Market manipulation according to the Directive 2003/6/EC 1 Transaction - based manipulation a. False or misleading transactions (unless AMPs) b. Price positioning (unless AMPs) c. Transactions involving fictitious devices/deception 2 Information - based manipulation a. Dissemination of false and misleading informationThe European Market Abuse Directive. Ferrarini 10
  10. 10. Introduction Core section Conclusion 1. Transaction - based manipulation a. False/ misleading transactions ([L3], CESR/04-505b) “transactions or orders to trade… which give, or are likely to give, false or misleading signals as to the supply of, demand for or price of financial instruments” [L1], Art. 1(2)(a)(ind 1) These are fictitious transactions, in respect of which “manipulation is best understood as a species of fraud” (Fischel and Ross, 1991) Practical examples: • Wash trades • Painting the tape • Improper matched orders • Placing orders with no intention of executing themDirective 2003/6/EC 11
  11. 11. Introduction Core section Conclusion 1. Transaction - based manipulation a. False/ misleading transactions ([L3], CESR/04-505b) Case study: Suppose that Mr Laudani owns securities of a particular company, which are, however, disregarded by the financial press and other investors. Therefore Mr Laudani “sells” his securities to one of his companies and “reacquires” them immediately in order to create some artificial market activity. Has Mr Laudani committed market manipulation?Siems, 2007 12
  12. 12. Introduction Core section Conclusion 1. Transaction - based manipulation a. False/ misleading transactions ([L3], CESR/04-505b) Case study: Yes, Mr Laudani has committed market manipulation. If there is no change in (beneficial) ownership, this “wash sale” can be market manipulation under Art. 1(2)(a)(ind 1). In order to constitute a false or misleading transaction it is necessary that Mr Laudani’s manipulation was successful. This means that his artificial market activity has to increase the demand in the securities. Usually this will be the case unless other market participants have completely counter-balanced Mr Laudani’s mispricing.Siems, 2007 13
  13. 13. Introduction Core section Conclusion 1. Transaction - based manipulation b. Price positioning (unless AMPs) ([L3], CESR/04-505b) “transactions or orders to trade… which secure, by a person, or persons acting in collaboration, the price of one or several financial instruments at an abnormal or artificial level” [L1], Art. 1(2)(a)(ind 2) Practical examples: • Marking the close • Colluding in the after market of an Initial Public Offer • Abusive squeeze • Creation of a floor in the price pattern • Excessive bid-ask spreads • Trading on one market to improperly position the price of a financial instrument on a related marketDirective 2003/6/EC 14
  14. 14. Introduction Core section Conclusion 1. Transaction - based manipulation b. Price positioning (unless AMPs) ([L3], CESR/04-505b)Real life example:• Nelson Bunker and WilliamHerbert Hunt were two Texanbrothers which owned ahedge fund and startedinvesting in silver to hedgefrom inflation•In August 1988 they wereconvicted with the accusationof conspiring to manipulatethe market 15
  15. 15. Introduction Core section Conclusion 1. Transaction - based manipulation b. Price positioning (unless AMPs) ([L3], CESR/04-505b)Real life example:• Their strategy was tosuddenly buy a great quantityof future contracts and holdthem until maturity, collectingthe underlying•Between 1973 and 1980, thesilver price rose from the$3-range to the $50 one perounce and they eventuallypossessed almost 50% of theworld deliverable supply 16
  16. 16. Introduction Core section Conclusion 1. Transaction - based manipulation c. Transactions involving fictitious devices/deception ([L3], CESR/04-505b) “transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance” [L1], Art. 1(2)(b) Practical examples: • Concealing ownership • Dissemination of false or misleading market information through media […]. This is done with the intention […] • Pump and dump • Trash and cash • Opening a position and closing it immediately after its public disclosureDirective 2003/6/EC 17
  17. 17. Introduction Core section Conclusion 1. Transaction - based manipulation c. Transactions involving fictitious devices/deception ([L3], CESR/04-505b) Case study: Mr Laudani’s securities are just “penny stocks”. Mr Laudani agrees to sell, and Miss Baiocco agrees to buy, these securities at rising prices. After a few weeks time the price of the securities is twenty times the original price. Now, Miss Baiocco sells all of her securities. Has Mr Laudani committed market manipulation?Siems, 2007 18
  18. 18. Introduction Core section Conclusion 1. Transaction - based manipulation c. Transactions involving fictitious devices/deception ([L3], CESR/04-505b) Case study: Yes, Mr Laudani has committed market manipulation. This form of market manipulation is called “pumping and dumping” : the buyer and seller act in collaboration to push the price of a security to an artificially high level and subsequently the buyer sells it for profit. Typically the security in question is an illiquid one – like a penny stock – so its price level is easy to manipulate.Siems, 2007 19
  19. 19. Introduction Core section Conclusion 2. Information - based manipulation a. Dissemination of false and misleading information ([L3], CESR/04-505b) “dissemination of information through the media… or by any other means, which gives, or is likely to give, false or misleading signals as to financial instruments… In respect of journalists when they act in their professional capacity such dissemination of information is to be assessed… taking into account the rules governing their profession, unless those persons derive, directly or indirectly, an advantage or profits from the dissemination of the information in question.” [L1], Art. 1(2)(c) Practical examples: • Spreading false/misleading information through the media • Other behaviour designed to spread false/misleading informationDirective 2003/6/EC 20
  20. 20. Introduction Core section Conclusion 2. Information - based manipulation a. Dissemination of false and misleading information ([L3], CESR/04-505b) Case study: The CEO of a company deliberately publishes incorrect price-relevant information about his company on its webpage. Has he committed market manipulation?Siems, 2007 21
  21. 21. Introduction Core section Conclusion 2. Information - based manipulation a. Dissemination of false and misleading information ([L3], CESR/04-505b) Case study: Yes, the CEO has committed market manipulation. This situation is a straight-forward case of market manipulation under Art. 1(2)(c). The CEO has published false information which gave a false signal as to financial instruments and he knew that the information was false. It does not matter whether he made any personal profit from this false information.Siems, 2007 22
  22. 22. Introduction Core section Conclusion 2. Information - based manipulation a. Dissemination of false and misleading information ([L3], CESR/04-505b) Case study: Suppose that a journalist, who read the information on the webpage, publishes it in his newspaper. Has he also committed market manipulation?Siems, 2007 23
  23. 23. Introduction Core section Conclusion 2. Information - based manipulation a. Dissemination of false and misleading information ([L3], CESR/04-505b) Case study: It depends on several factors. In general everyone can commit market manipulation by false or misleading information, if he or she could have known that this information was false. However, for journalists this may lead to unbearable risks. Therefore, the Directive states that with respect to journalists the rules governing their profession have also to be taken into account, unless the journalist derived profits from the dissemination of the information. Thus, it also depends on this criterion as well as the national press law whether there is market manipulation.Siems, 2007 24
  24. 24. Introduction Core section Conclusion 2. Information - based manipulationa. Dissemination of false and misleading information ([L3], CESR/04-505b)Real life example:•Maria Bartiromo and David Faber,anchors and interviewers of the CNBC,were accused of communicating on airreserved information about upgradingand downgrading of stocks in analystsreports, also thanks to the collaborationof Jim Cramer, editor of the SmartMoney magazine and owner of theCramer, Berkowitz & Co. hedge fund.•Accusations were unpunished becausethe journalist position was unclear underUSA law. 25
  25. 25. Introduction Core section Conclusion Exceptions Accepted Market Practices (AMPs)Only to [L1]Art. 1.2 (a)(ind 1/2) Safe Harbors Common interest To all MAD 26
  26. 26. Introduction Core section Conclusion Accepted Market Practices (AMPs)Article 1.2 of MAD: “Market manipulation‟ shall mean:(a) Transaction or order to trade: … unless the person who entered into the transactions or issued the orders to trade establishes that his reasons for so doing are legitimate and that these transactions or orders to trade conform to accepted market practices on the regulated market concerned…”Article 1.5 of MAD: “AMPs shall mean practices that are reasonably expected in one ormore financial markets and are accepted by the competent authority in accordancewith guidelines adopted by the Commission in accordance with the procedure laiddown in Article 17(2).” Hypotesis: Under the Italian Regulator[L1] [L1] [L4] AMPs - Legitimate Reasons (Acceptance by CONSOB 2009): - Conform to AMPs of -Liquidity Enhancement Agreements the Member State -Purchase of own shares to set up a shares warehouse position 27
  27. 27. Introduction Core section Conclusion Safe HarborsArticle 8 of MAD: “The prohibitions provided for in this Directiveshall not apply to trading in own shares in „buy-back‟ programmes orto the stabilisation of a financial instrument provided such trading iscarried out in accordance with implementing measures adopted inaccordance with the procedure laid down in Article 17(2).” AMPs ≠ Safe HarborsSafe Harbors are a sort of super strong cases of AMPs. In fact, AMPs do notneed the psychological elements and are the same for all MSs.You must satisfy strong requirements if you want this exception to beapplied (REG. EC 2273/2003) 28
  28. 28. Introduction Core section Conclusion Common interest (1)Article 7 of MAD: “This Directive shall not apply to transactionscarried out in pursuit of monetary, exchange-rate or public debt-management policy by a Member State, … or by any other officiallydesignated body ...” Real life example: •In 2008, Mr Berlusconi states: "O si fa Alitalia o si muore (…) Cordata italiana in 3-4 settimane.” •As a result, Air France exits from the negotiation to acquire Alitalia. 29
  29. 29. Introduction Core section Conclusion Common interest (2)•Finally, it was decided that“nell’esporre pubblicamente i suoiconvincimenti e l’orientamento dellasua parte politica sulla situazionedell’Alitalia non ha diffuso notizie falsene’ posto in essere artifici, ma haesercitato le sue legittime prerogativedi politico e di parlamentare (…) (suuna) questione di interesse generale eragionare diversamente significherebbelimitare arbitrariamente la liberta’degli esponenti politici di qualunqueparte politica di dibatterepubblicamente”. 30
  30. 30. Introduction Core section Conclusion Possible Signals of Market Manipulation Transactions (1) False or misleading transactions and Price positioning (Level 2, Art. 4 2003/124/EC) •orders to trade given or transactions undertaken represent a significant proportion of the daily volume or transactions… •orders to trade given or transactions undertaken by persons with a significant buying or selling position in a financial instrument lead to significant changes in the price… •no change in beneficial ownership… •orders to trade given or transactions undertaken include position reversals in a short period and represent a significant proportion of the daily volume … and might be associated with significant changes in the price… •orders to trade given or transactions undertaken are concentrated within a short time span in the trading session and lead to a price change which is subsequently reversed… •orders to trade… are removed before they are executed •orders to trade are given or transactions are undertaken at or around a specific time when reference prices, settlement prices and valuations are calculated…Level 2, Art. 4 2003/124/EC; Level 3, CESR/04- 31505b
  31. 31. Introduction Core section Conclusion Possible Signals of Market Manipulation Transactions (2) Transactions involving fictitious devices/deception ([L2], Art. 5 2003/124/EC) •orders to trade given or transactions undertaken by persons are preceded or followed by dissemination of false or misleading information by the same persons… •orders to trade are given or transactions are undertaken by persons before or after the same persons or persons linked to them produce or disseminate research or investment recommendations which are erroneous or biased…Level 2, Art. 4 2003/124/EC; Level 3, CESR/04- 32505b
  32. 32. Introduction Core section ConclusionG e n e ra l C o m m e n t s L i m i t s o r G r e y A r e a The MAD poses Some scholars have some conflict questioned the The lack of with the general capability of some MS reference of right of freedom Supervisory (Lithuania) intention as a of communication to monitor and ratio to effectively prohibit Market abuse determine criminal offence Some scholars have Some scholars have noticed that the criticized the moral Harmonization level instance of MAD values and rules. It doesn’t granted by the MAD follow a more isn’t maximum since economical rational the MS retain some discretion Since AMPs are defined by MS The MAD and authority, there will MiFID have some overlapping Problems be the problem of how judge conflict regulatory issue between MS differences
  33. 33. Introduction Core section Conclusion This attitude emerge The “Doroty complex” is aeven in the comment of constant of the UE recentthe CESR (ESMA) to the directive. However it The problem of theimplementation policy. doesn’t pose big problem prevalence of moral It suggest to avoid to in this case since the two on economicaldefine by law behavior directive share same rational isn’t general intent: enhance the transparency solvable Even if AMPs pose some problem their existence is well explain by the attempt of UE to create a best practice and not to define strict rules Solution “attempted” Even if the directive left Since many jurisdiction needs some discretion power intention to assess penal to MS the general idea is offence, many country (such as that there is a strong Italy and France) have developed convergence between a dual system between penal MS, hence should be (intention needed) and granted an appropriate administrative (objective harmonization level responsibility) ESMA may help and The MAD grants coordinate the exception for “weaker” MS journalism, but it authority in must be sure that detecting and set there is no up a best practice economical benefit 34
  34. 34. Introduction Core section Conclusion Is it working? 994 Sanctions applied of which: Imprisonments warnings Criminal fines Administrative warnings Administrative fines 0 100 200 300 400 500 600 700 Highest administrative fine applied: from EUR 64 to 7 million. Highest criminal fine imposed: from EUR 671 to 0.15 million Longest term of prison sentence: from 50 days to 10 yearsOpportunities for the Market Abuse Directive 35Revision
  35. 35. Introduction Core section ConclusionBibliography• AVGOUELAS, The emerging EU Regime for the Regulation of Market Abuse, 2005 (pages 276- 306)• ENGLE, Insider trading in US and EU Law: a comparison (pages 1-33)• DI NOIA, Reviewing Market Abuse regime: some indications from the ESME report. EU Commission Conference, Bruxelles, 2008• FISHEL, and ROSS, Should the Law prohibit "Manipulation" in Financial Markets? 105 Harv. L. Rev. 503 (1991)• G. FERRARINI, The European Market Abuse Directive, in 41 Common Market Law Review, 2004, 724-728 ( 3.3.)• SIEMS, The EU Market Abuse Directive: A Case-Based Analysis, 2007 (pages 1-27)• V. GOLDWASSER, Stock Market Manipulation and Short Selling. Centre for Corporate Law and Securities Regulation, 1999 36
  36. 36. Introduction Core section Conclusion BibliographyDIRECTIVES: Regulation: CESR - 2003/6/EC - EC 2273/2003 - 04-505b - 2003/124/EC - 02-089d - 2003/125/EC - Acceptance by CONSOB on 19 March - 2004/72/EC 2009. ACCEPTED MARKET PRACTICES - 2004/109/EC - Looking at the future of Market Abuse Enforcement. Carlos Tavares, Vice Chairman of CESR. Brussels, 2008 ESME Report -Market abuse EU legal framework and its implementation by Member States: a first evaluation. Brussels, 2007 European Commission - Internal Market & Services DG - Reviewing the Market Abuse Regime. Brussels, 2008 37
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  38. 38. Q&A 39

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