Cadwalader Clients & Friends Memo: The Proposed Revision of the Market Abuse Directive

Cadwalader Clients & Friends Memo: The Proposed Revision of the Market Abuse Directive

In September 2011, an unofficial draft of the European Commission's (the Commission) proposals for a new market abuse regime covering insider dealing and market manipulation (MAD II), was received by certain market participants. MAD II is intended to amend and update the existing Market Abuse Directive 2003/6/EC (MAD).

The primary function of MAD was the introduction of a framework for tackling market abuse. However, over the 8 years since MAD came into force, the Commission has identified a number of problems that have emerged as a result of regulatory, market and technological developments, including:

  • gaps in the regulation of new markets, platforms and over-the-counter instruments;
  • gaps in the regulation of commodities and related derivatives;
  • regulators lacking certain information and powers;
  • sanctions either lacking or insufficiently dissuasive, meaning regulators cannot effectively enforce under MAD; and
  • the existence of numerous options and discretions in MAD, as well as a lack of clarity on certain key concepts, undermines its effectiveness.

It was in the context of these problems that the Commission undertook to carry out a review of MAD and then in turn published its MAD II proposals. The major, and for the purposes of this note, most important provisions will be set out in a new market abuse regulation (the Regulation), which will be directly effective throughout European Union member states from when it is passed, on a par with national laws. The elements of MAD II dealing with criminal sanctions will be set out separately in a new directive (the Directive), which will require separate legislative implementation by the government in each member state within two years of coming into force.

Key changes proposed by the draft of MAD II are explained below, including the provisions that extend its scope to cover commodities derivatives. These include a specific definition of what constitutes "inside information" with respect to commodities, the categorisation of emission allowances and a broader range of commodities derivatives as "financial instruments", and the extension of the market abuse offences to cover spot physical commodity markets.

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