The Market Abuse Directive II (MAD II)

The Market Abuse Directive II (MAD II) is a new European community wide set or rules that prohibit insider trading and market manipulation.  MAD II is a more expansive and restrictive revision of the original Market Abuse Directive (MAD) enacted in 2003.  New technologies and platforms for trading as well as loopholes in MAD have proven the original directive inadequate.    MAD II rectifies these issues and strengthens efforts to ensure market integrity and investor protection. 

As the shortcomings of the original 2003 legislation became apparent, the European Commission began a consultative process across its member states.  The process revealed deficiencies.  New legislation was crafted that covered a wider scope.  Included in the new directive was everything from emission allowances to commodities and all aspects of financial trading.  Specifically spelled out in MAD II is a new criminal charge of attempted market manipulation, where even the attempt of manipulating markets, regardless of the actual outcome, is criminalized.  Furthermore, greater oversight and enforcement policies were established to harmonize criminal and administrative sanctions across the EU.

One glaring inadequacy of MAD was the fact that each member country of the EU had different laws governing trading on insider information and the manipulation of markets.  Under the old legislation, investors and traders wanted to use proprietary information to their benefit could shield themselves by taking advantage of the differences in legislation between countries.  Some country’s authorities were vested with less effective sanctioning powers while other countries lacked criminal sanctions for certain offences.  MAD II rectifies this situation by creating sanctions that all member states must adopt.  Each country will have a regulator to implement the new directive.  Effective and parallel legislation across all member states is essential for the stability of European markets.  MAD II also strengthens the cooperation between regulators in the financial and commodities markets and their investigative powers, ensuring even greater oversight and execution. 

Execution is nothing without sanctions.  The old directive allowed for varying sanctions to be implemented on individuals and entities accused and convicted of market manipulation.  This allowed investors to manipulate financial prices and indices, causing severe losses to consumers, from a safe haven.  MAD II institutes minimum sanctions against individuals and business entities across the European community.  The directive requires all member states to have national legislation that is consistent across the EU.  These sanctions are meant to have a deterrent effect.  Legal persons, including businesses, will be punished by proportionate fines and may include exclusion from public benefits and aid, disqualification from carrying out business activities, and permanent closure of the business.

MAD II, when fully implemented over the next few years, will usher in far reaching legislation designed to maintain the integrity of the European markets.  The new directive will also harmonize criminal and administrative sanctions, provide oversight and enforcement, and, ultimately, attempt to protect consumers from fraudulent market activities.  A key feature of MAD II is the enduring legacy it will provide.  Included in the legislation is a review clause that legally requires the European Commission to report to the European Parliament on the directive’s functioning and any changes that are required.  This report must be filed within four years.  While technology continues to advance, legislations to protect markets and consumers will follow.