The new EU market abuse regime and the derivatives markets

Abstract

International policymakers have identified the over-the-counter (OTC) derivatives markets as a source of systemic risk and market abuse. Although the OTC derivatives markets have been a source of financial innovation enabling counterparties to hedge and more effectively manage their risk exposures, they have also allowed market participants to take greater risks with more debt and to trade in a way that threatens both financial stability and market integrity. European policymakers have recognised these regulatory concerns by adopting the EU Market Abuse Regulation (MAR) that expands the civil offence of market abuse (insider dealing and market manipulation) to cover all financial instruments traded on and off regulated markets and exchanges in Europe and prohibits the use of manipulative devices, misleading practices and the misuse of privileged inside information in respect of the trading of these instruments. This article analyses the evolution of the market abuse offence in Europe and the main differences between the Market Abuse Directive 2005 and the Market Abuse Regulation 2014. The article suggests that MAR provides a more comprehensive regime that brings more transparency and accountability to EU markets, but its breadth of coverage to all financial instruments traded on and off exchange in European markets raises important concerns regarding its effectiveness and whether it can achieve its regulatory objectives of enhancing market stability and integrity.