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European Market Abuse Regulation Extended to the Commodities Sector

by Thomas Morgan

The Market Abuse Directive (MAD) was adopted by the European Parliament and the European Council in early 2003, introducing a framework to combat market abuse in the European Union (EU).  On June 2, 2010, the European Commission (EC) announced that MAD would be updated and strengthened, with one of the key objectives being to enhance the regulation of commodity and commodity derivatives markets to deal with insider dealing and market manipulation.  On October 20, 2011, the EC published its provisional drafts of the amended MAD and a new Market Abuse Regulation (MAR).  MAR sets out rules and administrative sanctions in relation to insider dealing and market manipulation (market abuse), while the amended MAD introduces criminal sanctions. The amended MAD and MAR are referred to jointly as MAD II.

In its current form MAD II broadens:

  • the application of the legislation to include financial instruments traded on organised and multilateral trading facilities and any traded over-the-counter (OTC), including spot commodity markets and emissions allowances.
  • the market abuse ban to cover attempted insider trading and attempted market manipulation.
  • the insider dealing restriction to cover amending or cancelling an order, even if this is done to avoid trading on the basis of inside information.
  • the market manipulation prohibition to cover all behaviour, not just entering into orders or transactions, and some high frequency and algorithmic trading strategies.
  • the scope of the legislation by phasing out the defence of behaviour being accepted market practice.

The MAD II package of proposals, like the complementary Markets in Financial Investments Directive proposals published on the same day, will now undergo negotiation by the EC, the European Council and the European Parliament before becoming law.  One of the main discussion points during these negotiations will be the definition of “inside information.” Market participants want the definition to align with the definition of inside information in the regulation on wholesale energy market integrity and transparency (REMIT), thereby ensuring that inside information concerning physical products that are covered by REMIT and inside information concerning commodity derivatives covered by MAD II are regulated in the same way. It is not yet known whether the current definition will be amended accordingly.      

The final form of MAD II is unlikely to enter into force before the end of 2012, but commodities businesses need to start preparing by reviewing all policies and procedures connected to their trading practices.  The implementation of procedures to detect incidents of potential market abuse, and policies for reporting and co-operating with regulators, will serve to minimise corporate and individual sanctions.




Trialogue Discussions Lead to Agreement on Final Text of EMIR

by Prajakt Samant

On February 9, 2012, following a series of trialogue discussions between the European Commission (EC), the European Parliament (EP) and the Council of Ministers (CM), the final text for the European Market Infrastructure Regulation (EMIR) was agreed.  The agreed text will now be voted on by the EP and the CM, although these votes are unlikely to lead to any changes of the text.  The final text of EMIR has not yet been published, but this is due to be circulated in the coming days. 

The agreement follows several weeks of trialogue discussions and non-agreement on several points in the regulation, particularly on issues concerning central counterparties, frontloading of contracts and intragroup transactions. Had an agreement not been reached by mid-February, it was likely that the text would have been subject to a second reading, leading to further delays in the publication of the final text.

The European Securities and Markets Authority (ESMA), along with the European Banking Authority (EBA), must now start drafting the technical standards which will be included in the text of EMIR.  The original deadline for the publication of these standards had been June 30, 2012, however, as a result of the delays in agreeing the final text, this deadline has been pushed back to September 30, 2012.  

By pushing back the deadline, ESMA and the EBA will be given sufficient time to seek the views of market participants on the levels of technical standards that should be adopted.  A public consultation on these standards is due to be launched around the end of February or beginning of March 2012, to which all market participants are strongly encouraged to contribute.  The technical standards concern matters including, inter alia, the clearing and reporting thresholds to be imposed on non-financial counterparties and the publication, by trade repositories, of aggregate positions by class of derivatives.   

With the deadline of the publication of technical standards being pushed back to the end of September, the 27 Member States of the European Union and market participants will then have less than three months to ensure that they have in place all the adequate systems to ensure full compliance with the regulation.  EMIR is due to come into force at the end of 2012, thus meeting the deadline set by the Group of 20 Summit in Pittsburgh in 2009. There has not yet been any formal indication that this implementation date will be pushed back, despite the delays in agreeing the final text. 




European Commission Blocks Proposed Merger Between NYSE Euronext and Deutsche Börse

by Prajakt Samant

The European Commission (EC) has blocked the proposed merger between Deutsche Börse and NYSE Euronext.  The decision follows the EC’s announcement that such a merger could cause a ‘near-monopoly’ in the European financial derivatives markets, by creating the world’s largest equity and derivatives exchange operator.   

The merger would have seen the uniting of Eurex (of Deutsche Börse) and Liffe (of NYSE Euronext), and would have resulted in the merged entity controlling more than 90 percent of European exchanged-traded derivatives.  Michel Barnier, the European Commissioner for Internal Market and Services, was in favour of the merger, arguing that it would create a European champion in the global financial market.

In taking its decision, the EC had to establish what the relevant market was.  The parties argued that the relevant market included exchange traded derivatives, as well as over-the-counter (OTC) and off-exchange traded derivatives.  By seeking to widen the scope of the market, the parties hoped to demonstrate that the proposed merger would not occupy a dominant position in the market and would therefore not be deemed to be anti-competitive.

However, the EC found that the relevant market included exchange-traded derivatives only, with OTC and off-exchange derivatives forming a separate market, as the products had different characteristics and fulfilled different customer demands.  This conclusion was reached on the following grounds:

  • Exchange-traded derivatives are fully standardised liquid products whereas OTC derivatives allow for the customisation of their legal and economic terms and conditions.
  • Exchange-traded derivatives are usually traded in small sizes (around EUR 100,000 per trade) whilst the average trade size for OTC derivatives is much larger (around EUR 200,000 per trade).
  • By definition, OTC trades cannot be undertaken on exchange.
  • Certain customers will only trade on exchange as they either cannot, or will not, trade OTC.  This could be for risk management reasons, or not having the required mandatory or operational set-up to trade OTC.

The EC’s decision does not follow the decision that was taken by several other regulators.  Approval for the merger had been granted in Germany, Luxembourg and in the U.S. by the Committee on Foreign Investment in the United States, the Department of Justice and the Securities and Exchange Commission. 

It is not yet known whether the EC’s decision will be subject to appeal, although such an appeal, if pursued, could last several years.  The remedies offered by the two parties, including the sale of Liffe’s European single stock equity derivatives products where these compete with Eurex, were deemed to be insufficient by the EC, particularly as they did not extend to existing competing products.  




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