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The AFM has put regulation of market abuse firmly on the map during the last five years. While the initial years were mainly devoted to explaining the rules, the standard for prompt publication of price-sensitive information has become clear for the majority of market parties in 2010. Nowadays, discussions are mainly about technical interpretations. By publishing price-sensitive information sooner, the risk of insider trading is reduced, especially with press releases on mergers and acquisitions.
The report ‘Five years of regulating Market Abuse’ shows that the AFM has conducted more than 250 investigations into possible market abuse during the past five years, and has issued more than 30 reports to the Public Prosecutor. The AFM has also taken enforcement action, not only against companies that did not publish price-sensitive information promptly, and against investors guilty of insider trading, but also against market parties with a duty of disclosure, whose transactions were not promptly reported to the AFM. Furthermore, the AFM has exercised its power to suspend trading in financial instruments some 30 times.
Various investigations of insider trading were completed and passed to the Public Prosecutor. In some large acquisition cases, the AFM has cooperated closely with fellow European regulatory bodies. In these cases, rising prices during takeover bids were grounds for investigation. Meanwhile, these parties have been reported to the Public Prosecutor in various countries. Besides the AFM, several regulatory bodies in other countries have issued reports to the Public Prosecutor as well.
A number of new orders and prohibitions came under the AFM’s supervision in October 2005, with the implementation of the Market Abuse Directive into Dutch legislation. The two most important innovations were:
- expansion of the ban on market manipulation; and
- the AFM’s supervision of the immediate disclosure of price-sensitive information.
Price-sensitive information
Examination of false and incorrect information that is deliberately spread in the market continues to be one of the main focuses for the AFM. Market integrity is very important for confidence, and thus for the proper operation of the markets in financial instruments and the protection of investors. When there is no confidence, this can result in investors and capital seekers no longer being willing to trade actively in these markets. The importance of correct and non-manipulated information for investors has been a top priority at the AFM over the past five years. The AFM has therefore been in regular contact with market parties, and has published guidance on various topics in the area of market abuse.
A lot of attention has been paid to creating a level playing field, in which price-sensitive information must be published as promptly as possible. The AFM has observed that in some cases, however, very many people are involved with this type of information before it is made public. This can give rise to risks, such as the premature leaking of information. The AFM will continue paying close attention to this in the future.
Technological innovation combined with the increase in the number of trading sites requires the AFM to employ an electronic detection and analysis system to identify suspicious transactions. Alerts are generated daily on the basis of models that indicate possible market manipulation and insider trading. This allows the AFM to detect certain types of market abuse in a targeted manner. During the coming years, the AFM will place more emphasis on the statistical analysis of transactions and price movements, and use algorithms to search through the reported transactions.
Dispersed trading
Due to the introduction of the Markets in Financial Instruments Directive (MiFID) in 2007, trading in securities now takes place on many trading platforms, resulting in the AFM having to extend its supervision. In addition, the globalisation of capital markets creates more complexity and inter-relatedness of financial sectors. This requires further integration and harmonisation of European regulation of market abuse and international cooperation in investigations.
To maintain regulation in a fragmented market, and to reduce the turnaround time of market abuse investigations, the AFM considers compulsory client identification necessary. With such a ‘client ID’, the AFM can conduct more targeted and more efficient investigations into market abuse. This would make individual trading patterns easier to trace and there can be better tracing of noticeable trading patterns back to the responsible market party.
To enable better tracing of information leaks and to identify the market parties involved, the AFM also urges that companies are required to report to the AFM when they legitimately delay the publication of price-sensitive information. This has the advantage that the AFM can then pay closer attention to the prices and volumes of financial instruments of this company.
Special circumstances
The special circumstances during the credit crisis forced the AFM to take measures against short selling of shares in financial institutions, partly because of the risk of price manipulation. Short selling also takes place on the European government bond market. However, in its report ‘The government bond market in a European perspective’ of August 2010, the AFM concluded that there is no evidence that market parties manipulated the bond market.
Since the introduction of the Market Abuse Directive, the number of interests with a duty of disclosure in the Netherlands has declined. With the advent of the 2006 Wmz (Disclosure of Major Interests Act), the disclosure regime was revised in a number of aspects. In the opinion of the AFM, there should also be an obligation to disclose economic interests, ‘long positions’, which provide their holders with the opportunity to exercise control on the issuer, in addition to the duty of disclosure of substantial interests. This would provide investors with more insight into the ownership relationships of a listed company.
Market Abuse Directive Revision
The European Union is currently on the threshold of a revision of the Market Abuse Directive. There have been many developments in the market since the implementation of this Directive. This AFM-report outlines a picture of five years of regulating market abuse, which deals with both the conduct of market parties and how trading takes place. For this moment the report is only available in Dutch.
