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.