The EU Market Abuse Regulation and the Use of General Clauses Thereunder

The EU Market Abuse Regulation (Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse, ‘MAR’) provides, in the context of EU financial markets law, a striking example of the importance that so-called general clauses can have within a given regulatory regime. The text of the MAR – notoriously structured along two main regulatory veins concerning, on the one hand, inside information, and, on the other hand, market manipulation – is marked by the presence of a number of provisions with broad scopes that are not expressly defined: ‘reasonable investor’, ‘artificial’ market prices, ‘false or misleading’ market conditions, etc. Such provisions are typical examples of the complex and articulated universe of legal general clauses, underpinned by a considerable interpretative elasticity. Unless defined within the legal text, the understanding of their content necessarily relies on external criteria.

The MAR is actually based on a meticulous system of ’values’, which are reflected and subsequently materialised in several provision of the Regulation such as those that refer to a “reasonable” investor,  “artificial” market conditions, “abornal” prices, or “accepted” market practice, amongst others.

In everyday language, the term ‘value’ can carry at least two different meanings: first, anything that is objectively held to be important or is subjectively desired has value. In a different sense, the term signifies the criterion of valuation, ie a principle or rule on the basis of which an evaluative judgement is made, culminating in the approval or disapproval of a given conduct, act, or fact. It is in this second sense that the concept of value is to be construed and applied in the context of MAR.

However, this raises the question of what these ‘values’ actually are. How should one evaluate, for example,  a ‘reasonable’ investor, or what might constitute ‘normal’ or ‘artificial’ market conditions?

Broadly speaking, rules against market abuse can be described as provisions designed to ensure that the market is not distorted by conduct that may disrupt its proper functioning. The misuse of inside information, the dissemination of false or misleading news, as well as the carrying out of transactions that undermine the physiological process of trading and price formation are all conducts that conflict with the need to protect what is believed to be the ’proper’ functioning of markets. While this assertion is quite self-evident, it is nevertheless insufficient.

To gain a deeper understanding of the regime, it is thus essential to examine where the theoretical roots of the MAR lie and what its founding values and objectives consist of. This topic is developed in my paper.

In accordance with the tenets of the Regulation, the provisions against market abuse are intended to ensure market integrity and safeguard investor confidence. Concurrently, the obligation of issuers to promptly disclose to the public inside information directly concerning them serves to enhance the informational efficiency of markets and also functions as a preventive measure with respect to insider trading. While market integrity and investor confidence remain crucial elements for understanding the fundamentals of MAR, they provide nonetheless only a partial response to the question of what the underlying values of the Regulation are and how they should be considered when interpreting its provisions. Indeed, it is rather the pursuit of a different fundamental objective, namely market efficiency, which is at the heart of the Regulation’s most important concepts and provisions. This objective finds its most influential theorisation in the Efficient Capital Markets Hypothesis (‘ECMH’), widely cited in the literature on market abuse as a foundational paradigm of the Regulation. Indeed, it would appear reasonable to suggest that EU market abuse legislation should almost be considered as a truly normative concretisation of the ECMH .

The link between the ECMH and the broader concept of efficiency, on the one hand, and the specific market abuse regime dictated by the Regulation, on the other, is evident on several levels.

First, in the recitals of the Regulation, market efficiency is explicitly referenced. Recital (2), for instance, states the need to protect the integrity of an integrated, transparent, and efficient market. The pivotal element of the system is, however, the notion of a reasonable investor, one of the central concepts of the definition of inside information, and which is built on paradigms of economic rationality. Beyond that, the paper explores the various sections of the Regulation’s text, providing several indications of the alignment of the MAR regime with the theories on efficient markets, not just in relation to the rules applicable to inside information but also, and most noticeably, to those applicable to the different kinds of market manipulation. The paper tries to demonstrate, therefore, that the ‘values’ that should guide the interpretation of the Regulation’s general clauses are those anchored in the ECMH theories, regardless of whether those theories are accepted by the majority of literature or challenged by different models that provide alternative, and perhaps even more compelling, justifications for how markets function or ought to function.

To illustrate, an ‘abnormal or ‘artificial’ price condition should be intended as one that arises from market conducts that disrupt the model of an efficient market, based on equal access to information, equality of treatment among market actors, and conditions of open and free competition. A ‘deception’ or a ‘fictitious device’ are those that are not accepted on a market microstructure which operates on the basis of similar paradigms. A ‘reasonable’ investor is, ultimately, a rational market actor whose investment decisions are based on available information and not on other values such as moral considerations, or behavioural biases.

In conclusion, these are the values that underpin the MAR regime as established by legislators. Thus, unless a major legislative reform reshapes the system of values on which the MAR is based, the interpretation of its numerous general clauses and their application and enforcement must be guided by these values, even if this might prove at times difficult or controversial.

The full article can be accessed here.

Filippo Annunziata is Professor of Financial Markets Law at Bocconi University and Professor of International Financial Regulation at Cà Foscari University.