Opinion of the Czech National Bank regarding the consultation on the
Review of Directive 2003/6/EC on insider dealing and market manipulation(Market Abuse Directive)
The CNB’s opinion on the Call for Evidence – generally
We hold the view that the European regulations should be amended in a cautious and limited fashion and that the interpretation problems should be addressed primarily in the Level 3 Committees (i.e. primarily by means of CESR guidelines/recommendations) instead of by making permanent changes that will complicate the legislation adopted only recently. Nevertheless, we support technical clarifications or simplifications and measures that will make life easier for the private sector (cuts in costs/bureaucracy) without affecting the objectives that are being pursued (for instance, we agree with limiting a Member State’s discretion to add more items to an insider list beyond the framework required by Directive 2004/72/EC, with the removal of the confusing definition of inside information for commodity derivatives, and with the expansion of safe harbours for buy-back programmes).
The exceptions to the aforementioned minimal change rule are as follows:
- amendments to the MAD linked with the financial crisis
the MAD contains a deferred disclosure mechanism; there are doubts about whether this mechanism is workable in bank bailouts and about how to proceed in the event of uneven dissemination of information, so there is a need to consider a special exemption for banks (preferably restrictive in order to prevent circumvention of the law);
- expansion of the scope of the MAD to cover multilateral trading facilities (MTFs),
MTFs are an alternative to regulated markets; if MTFs are comparable with regulated markets as regards value/volume traded, it makes sense to apply market manipulation measures to them as well;
- reformulation of the prohibition of use of inside information,
this is a repeatedly debated interpretation issue addressed by the European Court of Justice (ECJ) under the previous 1989 directive and now again in connection with the Spector Photo Group case; it would be useful to clarify this issue, as we have concerns that even the new ECJ ruling will not change the current non-uniform state of transposition and application in the EU.
CNB´s opinion on the individual questions
Question concerning the extension of the scope of MAD to MTFs
Q:Do you consider that the scope of the MAD should go beyond regulated markets? In particular, should it be extended to cover MTFs?
The CNB believes that the scope of the MAD should be extended to cover MTFs, but only those which are comparable with regulated markets in terms of trading volumes (liquidity) and where there is a risk of manipulation which the regulation should take into consideration. We cannot agree to any further expansion of the MAD beyond MTFs, because we are concerned that the costs of regulation would exceed the benefits. Only the rules on manipulation, not on insider trading, should apply to MTFs (issuers of listed securities are not required to fulfil disclosure duties on MTFs), except in the case of instruments admitted to trading simultaneously on a regulated market. The CNB agrees with the Commission that the extension to MTFs requires further discussion, especially as regards finding the (trading volume) criteria defining the MTFs to which the MAD will apply.
Questions concerning the definition of financial instruments
Qs: Do you agree with an alignment of the MAD definition of financial instrument to the definition for the same concept provided for in MiFID? Do you think it could be useful to explain in more detail in the MAD what is meant by a financial instrument "whose value depends on another financial instrument" or to list asset classes, such as CFDs and CDS, which belong to this category?
The CNB supports the removal of the interpretation difficulties stemming from the different definitions of financial instruments in the MAD and MiFID. In the CNB’s opinion, the answer consists in aligning the definition of, or the reference to, financial instruments as they are defined in MiFID. At the same time, however, some instruments should be excluded from the MAD, for example exotic derivatives for which there is no need for regulation.
As to the ambiguity whether contracts for differences (CFDs) are, or should be, covered by the MAD (use of inside information), the CNB’s view is that yes they should, otherwise the regulation would be ineffective and would allow easy circumvention. If ambiguity does arise, the CNB supports the Commission’s intention to clarify as stated.
As to the interpretation of Article 9(2) of the MAD, the CNB’s view is that nonstandard instruments should also be regarded as financial instruments not admitted to trading on a regulated market but whose value depends on a financial instrument admitted to trading on a regulated market.
The CNB believes that it would be appropriate in the interests of legal certainty to amend Article 9(2) of the MAD and to clarify what is meant by a financial instrument whose value depends on another financial instrument. It would seem appropriate to add an example list (an exhaustive list is problematic, as the regulation can respond to market developments only with a lag, i.e. some instruments would not necessarily be covered by the regulation as time progressed).
Question concerning the extension of the scope of MAD to physical / commodity markets
Q: Do you see a need for introduction of a market abuse framework for physical markets?
The CNB does not agree with the extension of the regulation to cover physical markets (energy markets). The CNB sees differences between the regulation of financial instruments and the regulation of commodity trading and agrees in particular with the opinion that the MAD framework does not reflect the specific features of commodity trading on physical markets. Before introducing any special regulation for physical markets, there is a need to analyse whether such a step would be useful/necessary (RIA). The CNB is concerned that the costs of new regulation would be higher than the potential benefits.
Question concerning the revision of the inside information definition
Q: Do you share this view as far as insider dealing prohibition is concerned? (see also next point for disclosure of inside information). If not, which concepts would you advise to modify and how?
The CNB agrees with the Commission that there is no need to change the definition of inside information in the MAD.
The CNB regards any change to the definition of inside information in the MAD as problematic, because it would probably lead to new/other interpretation ambiguities and difficulties. The interpretations can be unified and the interpretation difficulties resolved at CESR level.
However, the CNB believes it would be worthwhile to discuss elaborating the elements of the definition of inside information in Article 1(2) of Implementing Directive 2003/124/EC, according to which information a reasonable investor would be likely to use as part of the basis of his investment decisions has the potential to affect the prices of financial instruments. The CNB is of the opinion that this clarification is not useful, as a reasonable investor will not take non-price-affecting information into account anyway (and it is not a case of inside information), and conversely the effect on prices is due to the fact that a reasonable investor takes it into account in his investment decisions. Likewise, the CNB has doubts about the definition of the “precise nature” of inside information given in Article 1(1) of Directive 2003/124/EC, according to which information is of a “precise nature” if it indicates a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of financial instruments.
The CNB believes that the interpretation of the definition of inside information, or the elements thereof, should be left to the more flexible Level 3 Committees (hereinafter “L3C”) and that the clarification in Implementing Directive 2003/124/EC is not useful.
Question concerning the inside information definition for commodity derivatives
Q: Do you support an alignment of the inside information definition for commodity derivatives with the general definition of the directive?
The CNB regards the current inside information definition for commodity derivatives as vague and ambiguous; therefore it supports the abrogation of this particular definition and advocates the direct application of the general definition of inside information.
Question concerning the definition of inside information for disclosure purposes
Q: Do you consider that any changes to the definition of inside information for disclosure purposes are necessary?
The CNB agrees with the Commission that there is no need for a separate definition or a change in the definition of inside information for deferred disclosure principles. Any problems or divergent interpretations can be resolved at L3C.
However, the CNB supports the ESME recommendation to clarify the scope for deferred disclosure by deleting the “not likely to mislead the public” condition.
Abuse of the option of deferring disclosure is prevented by the fact that deferred disclosure is framed in the MAD as an exceptional case where protection of the economic interests of an issuer outweighs the public disclosure interest (disclosure may only be deferred on compelling grounds).
Questions concerning the exemption of financial stability measures from the obligation of disclosure of inside information
Q: Do you agree that the described deficiencies of the deferred disclosure mechanism need to be addressed, possibly by way of amendments to the MAD framework? Do you consider that Level 3 guidance could be sufficient? Q: Do you agree that the issuer may be exempted from disclosing inside information in situations when that information concerns emergency measures being prepared in case the issuer's financial stability is endangered? Q: What are other deficiencies in this area that raise major interpretation / application difficulties? What is the best way to address them?
As regards rescue programmes for issuers implemented in the interests of maintaining financial stability (in the Czech Republic this currently applies to banks only, but insurance undertakings can be envisaged in the future), the CNB is of the opinion that the public interest justifies the application of measures that do not conform to the usual MAD standards. In this regard, the CNB has no objections to modifying the MAD and including an exemption for measures implemented in the interests of maintaining financial stability. The wording of the exemption should be formulated restrictively to prevent circumvention of the legislation (abuse of the exemption). At the same time, the competent authority’s powers to decide on the issuer’s disclosure obligation should be specified. This would be practical in the event of massive leaks of inside information or in the event of an entity trying to abuse the exemption.
The CNB believes that neither the current European legislation nor the L3C recommendations/guidelines are entirely sufficient in this specific case, as it is necessary to ensure a clear legal framework and legal certainty on the part of issuers.
The CNB wishes to add that the legal certainty regarding fulfilment of the conditions for deferred disclosure will be increased – and many of the problems that have arisen will be removed – if the “not likely to mislead the public” condition is deleted (see the answer above).
In the area of deferred disclosure the CNB has been addressing questions relating to buy-back programmes which are not included within the scope of Commission Regulation (EC) No.2273/2003 (hereinafter the “Regulation”) but do not represent market abuse. In such cases, the rules on the disclosure of inside information laid down in the MAD are applied instead of the disclosure rules set forth in Article 4 of the Regulation. The question has been what to disclose and to what extent, or the disclosure of what information can be deferred (for example, to what extent or in how much detail to disclose the conditions and strategies under which an investment firm is to purchase shares for an issuer). In this area the CNB sees scope for clarification at L3C.
Question concerning the inside information disclosure in commodity derivatives markets
Q: Do you agree with this approach? Can you identify cases where a modification or deletion of the obligation may be undesirable for market integrity?
The CNB does not agree that the MAD needs modifying in this area. If commodity derivatives issuers do not have inside information, they cannot disclose it. If they do have inside information, they should be subject to the general regime, i.e. disclose. The CNB agrees that issuers/creators of commodity derivatives (who are often regulated market operators) will not usually know about inside information arising among commodity producers. This, however, cannot be addressed by imposing the obligation on mining or manufacturing companies. Enforcing compliance with the obligation by non-EU producers would be unworkable. Any modification would probably be in contravention of the “Action Programme for Reducing Administrative Burdens in the European Union”.
Question concerning the formulation and understanding of insider dealing prohibition
Q: Would you support this approach?
The CNB does not support this approach. The CNB is of the opinion that there is no merit in waiting for the ECJ ruling in the Spector Photo Group case and that a discussion should be held on the formulation of the prohibition of insider dealing with the exemptions stipulated in the directive (for example the exemption from the prohibition if the insider is obliged to acquire or sell the instrument under an agreement concluded before the person concerned possessed the inside information) and possibly also on the possibility of exonerating a person possessing inside information on special grounds (the person proves credibly that he would have executed the trade even if he had not been in possession of inside information, for example he took steps to sell after having received the information only while executing the transaction).
In the CNB’s opinion, the MAD needs to be amended because, in view of the expected ECJ ruling, an interpretation opinion from the Commission/CESR will not suffice and the ECJ ruling will not remove the existing legal uncertainty and different interpretation. The CNB bases this conclusion on the following rationale: (i) in respect of the previous directive regulating trading by persons possessing inside information (Directive 89/592/EEC), the ECJ ruled in the Georgakis case (C-391/04) that insider trading must be interpreted as meaning the taking advantage of information, and not without subsequent actual execution of trades by the insider (the persons possessing inside information traded only between themselves and according to the ECJ this trading did not constitute prohibited insider trading because all of them had the same information, hence they did not take advantage of the inside information), (ii) in the CNB’s view, the MAD is a minimal transposition directive allowing the Member States to formulate the prohibition of dealing (i.e. more stringent rules).
Question concerning the insider list contents
Q: Do you consider that the obligations to draw up lists of insiders are proportionate?
The CNB regards the obligation to maintain insider lists as useful. The CNB believes that the obligation to maintain insider lists should be limited to issuers. The issuer can make sure contractually that its legal and economic advisers inform it about the persons working for these representatives who have access to inside information and indicate those persons on the list. The CNB supports the Commission’s efforts to ensure that Article 5 of Directive 2004/72/EC contains an exhaustive set of requirements for the content of insider lists without the possibility of the Member States adding their own items. It also supports technical modifications directly in the implementing directive that will lead to unification of the rules for maintaining insider lists in the Member States and remove the interpretation ambiguities.
Question concerning the possible revision of transaction reporting by managers
Q: Do you see a need for a regulatory action in the above areas? Would you suggest further improvements?
The CNB sees a need to improve the regulation and agrees with the Commission’s initiative in this area. The absence of numerous technical provisions and the ambiguity of the existing provisions cause interpretation difficulties which are then transferred into national law, where they are intensified during transposition. This results in individual (and different) interpretations and solutions by individual competent authorities. The CNB has encountered and resolved the problems mentioned in the Call for Evidence in practice. For example, with regard to the 5 thousand euro threshold it is not clear from Directive 2004/72/EC whether to report the final transaction that caused the threshold to be exceeded, or all the preceding transactions as well, or what exchange rate to use to calculate the threshold where the euro has not been adopted (the exchange rate of the final transaction, the exchange rates of the individual transactions); there is no obligation for closely associated persons to communicate their transactions to managers, and so on. As regards the possibility of raising the threshold above 5 thousand Euros, the CNB agrees with this only on condition that the application of the exemption is unified at EU level, otherwise it suggests leaving the limit as it is.