3. Index of Presentation
•SECTION 1: Introduction
•SECTION 2: Insider Trading
•SECTION 3: Manipulation
•SECTION 3: Manipulation
•SECTION 4: Manipulation VS BBP & Stabilisation
•SECTION 5: Preventive Measures
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4. Introduction 1
•Market Abuse Directive: timetable
•Market Abuse Directive: timetable
•1989: Directive on insider trading (89/592)
•1999: Financial Services Action Plan
1999:
•2000: Lisbon Council, implementation of FSAP by
• 2005; Wise Men Committee
005; se e Co ttee
•2001: Lamfalussy Report, 4 level approach
•2001: Commission proposal
p p
•2002: Common position; Cesr
•2003: Final Directive
•2004, October 12: deadline for implementation (include laws,
regulations and administrative provisions)
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6. Introduction 3
•CESR/Commission: level 2 timetable
•2002 March Commission 1st request to CESR for advice on
•2002, March. Commission 1st request to CESR for advice on
implementing measures
•2002, April on. Expert‐Consultative Working Group meetings
2002, April on. Expert Consultative Working Group meetings
•2002, July. CESR 1st Consultation paper
•2002, December. CESR final advice to the Commission
,
•2003, January. Commission 2nd request to CESR for advice on
implementing measures
•2003, March. Commission publishes draft directives (2) and
regulation (1) on implementing measures
•2003 April CESR 2nd Consultation paper (Additional level 2
•2003,
implementing measures)
•2003, May. Inter‐Institutional Monitoring Group, First Report
, y g p, p
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7. Introduction
I t d ti 4
R f di ti k t b
•Reason for a new directive on market abuse
(insider trading + market manipulation)
NO existing directive on mkt manipulation (only on insider)
Great diversity at national level (rules and enforcement)
G di i i ll l( l d f )
New financial instruments and techniques increasing mkt
manipulation
Need to protect market integrity to ensure integration of
financial markets (other directives: ISD, single prospectus,
transparency, takeover)
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8. Introduction 5
Measures to Promote Market Integrity
intermediaries
issuers exchanges
Price
P e
regulators Discovery
Process
Institutional
Analysts investors
Mass - Media
Financial
3/11/2009
journalists
Limiting Market Abuse - Bashir Al Nakib 8
9. Introduction 6
Market Integrity (2003/6/EC Directive)
– An integrated and efficient financial market requires
market integrity.
k t i t it
– The smooth functioning of securities markets and
public confidence in markets are prerequisites for
economic growth and wealth.
i th d lth
– Market abuse harms the integrity of financial markets
and public confidence in securities and derivatives
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10. Insider trading - Example
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12. The 2003/6/EC Directive
Insider Trading
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13. Insider trading 1.1
11
Definition of “inside information” Art 1
inside information Art.
•"Inside information" shall mean information of a
precise nature which has not been made public,
relating, directly or indirectly, to one or more issuers
relating, directly or indirectly, to one or more issuers
of financial instruments or to one or more financial
instruments and which if it were made public would
and which, if it were made public, would
be likely to have a significant effect on the prices of
those financial instruments or on the price of related
those financial instruments or on the price of related
derivative financial instruments
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14. Insider trading 1 2
1.2
Definition of “inside information” (more)
inside information
– Member States should tackle the practice known as
Member States should tackle the practice known as
"front running", including "front running" in commodity
derivatives, where it constitutes market abuse under the
definitions contained in this Directive (whereas n. 19)
– For persons charged with the execution of orders
concerning financial instruments, "inside information"
shall also mean information conveyed by a client and
related to the client's pending orders…. (Art.1, 1 3rd
para.))
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15. Insider trading 2
Level 2
European Commission asked advice on the
meaning of:
1) Precise nature
2) Price sensitive
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16. Insider trading 2 1
2.1
1) precise information (
(art. 2 draft directive)
)
a) Information consisting of a matter or an event
information
of a precise nature shall mean any
which is true or could reasonably be expected to
become true in the future…
(remember: relevant definition also for issuers
disclosure!)
“True”: based on firm and objective evidence (as
opposed to Rumours) which are not are not
inside information
“could become true”: uncertain but
contingencies don’t mitigate precise of info (if
(
expected merger doesn’t occur, this could be in
3/11/2009
any case precise info).Bashir Al Nakib
Limiting Market Abuse - 16
17. Insider trading 2 2
2.2
1) precise information (
(art. 2 draft directive)
)
b) …when this information is specific enough to allow
a conclusion to be drawn about its possible impact
on prices
The information should be price sensitive
A piece of info “allow a conclusion …”: ”:
Either when enable a reasonable investor to
take an investment decision without (or at
very low) risk
)
Or when it is likely to be exploited immediately
on the market
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18. Insider trading 2 3
2.3
2) price sensitivity of information
(art. 3 draft directive)
“Information which … would be likely to have a
significant effect …” mean ex‐ante available
g
information an average person would be likely to use
as part of the basis of his investment decisions in
order to optimise his interests
order to optimise his interests
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19. Insider trading 2 4
2.4
2) Price sensitivity
Market participants have to be able to assess beforehand whether the
information is price sensitive, in order to be able to act accordingly,
regarding the duties of confidentiality, prompt disclosure and prohibition
to enter iinto transactions.
i
This assessment has to take into consideration the market impact, which
would be foreseeable at the moment when the information has not yet
been disclosed.
Ex-ante factors have to be found in order to guide market participants in
their decisions. Any (relevant) information available at the time has to be
decisions
taken into account. Other variables would include prices, returns,
volatilities, liquidity, price relationships among financial instruments,
volume, supply, demand, order book, timing of prices and news
disclosure, rules governing the exchange and market microstructure, etc.
A piece of information could be considered as likely to have a significant
effect on prices of financial instruments even though, when the piece of
though
information is published, this doesn’t actually produce any effect.
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20. Insider trading 2 5
2.5
2) price sensitivity:
Useful indicators:
Type of info is the same as info which had in the
past a significant effect on prices
Pre-
Pre-existing analyst’s reports and opinions
indicate the that type of info is price sensitive
Issuers itself has treated similar events as inside
info
List of price sensitive information: point 35 (Level
3)
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21. Insider trading 3.1
Definition of insider trader (Primary insiders) Art 2
Art.
•…Any person who possesses an inside information:
• (a) by virtue of his membership of the administrative,
management or supervisory bodies of the issuer, or
management or supervisory bodies of the issuer or
• (b) by virtue of his holding in the capital of the issuer,
or
• (c) by virtue of his having access to the information
through the exercise of his employment, profession or
,
duties, or
• (d) by virtue of his criminal activities.
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22. Insider trading 3.2
Definition of insider trader (Secondary
insiders -Tippees)
pp )
•The prohibitions applicable to the Primary
insiders should also apply to any person, who
p
possesses inside information while that person
p
knows, or ought to have known, that it is inside
( )
information (Art. 3).
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23. Insider trading 3.3
Prohibition
•Member States shall prohibit any person (primary + secondary insiders)
…. who possesses inside information from:
…. who possesses inside information from:
using that information by acquiring or disposing of, or by trying to
acquire or dispose of, for his own account or for the account of a third
party, either directly or indirectly, financial instruments to which that
information relates;
disclosing inside information to any other person unless such
disclosing inside information to any other person unless such
disclosure is made in the normal course of the exercise of his
employment, profession or duties; (confidentiality duties)
recommending or inducing another person, on the basis of inside
information, to acquire or dispose of financial instruments to which that
information relates.
information relates
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25. Manipulation 1 Definition (Art 1 2)
(Art. 1.2)
1. Transactions or orders to trade:
which give or are likely to give, false or misleading signals as to the
give, give
supply of, demand for or price of financial instruments, or
which secure, by a person, or persons acting in collaboration, the price
of one or several financial instruments at an abnormal or artificial
level;
2. Transactions or orders to trade which employ fictitious devices or any
2 T ti d t t d hi h l fi titi d i
other form of deception or contrivance;
3.
3 Dissemination of information through the media, including the Internet,
media Internet
or by any other means, which gives, or is likely to give, false or
misleading signals as to financial instruments, including the
dissemination of rumours and false or misleading news, where the
person who made the dissemination knew, or ought to have known, that
the i f
th information was false or misleading.
ti f l i l di
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26. Manipulation 1.1
Types of manipulation:
T f i l ti
− trade b
d based manipulation
d i l i
− information based manipulation
− action based manipulation
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27. Manipulation 1.2
Trade b
T d based manipulation -
d i l ti
− In this case the manipulator tries to cause a price
change in the price of a security by trading in the
market.
k
− E.g. the manipulator through a series of purchases
in the market tries to induce others to think that he is
an insider and thus to follow him in buying the
security in order to create a “speculative bubble”
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28. Manipulation 1.3
13
Action based manipulation
− In this case the manipulator tries to cause a
change in the price of a security through actions
that give the appearance of an active market in
such security
h it
Examples:
• wash sales ((transactions involving no change in the beneficial
f
ownership of the security);
• matched t d (th b
t h d trades (the buyer and seller h
d ll have previously agreed
i l d
to cancel the effects of the trade);
• In both the examples the manipulator is bearing no risk
risk.
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29. Manipulation 1.4
Information based manipulation
− I this case the manipulator tries to cause a
In hi h i l i
change in the price of a security by spreading
false, exaggerated or misleading information.
− Internet is the ideal way to implement such
y p
strategy
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30. Manipulation 2
CESR approach
Signals to be taken into account for
Level 2
L possibly manipulative behaviours (art 8 of
(art.
draft directive)
Rules related to
•market microstructure
•market liquidity
Level 3
diagnostic flags: indications which should
draw further scrutiny and are likely to be
present individually or cumulatively as
signals of manipulative behaviour
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31. Manipulation 2 1
2.1
1) Orders which produce false signals
2) Orders which secure the price at an abnormal or
artificial level
Factors offering a strong indication: indication:
•The extent to which orders given or transactions undertaken represent a
significant proportion of the daily volume of transactions in a financial
instrument, in particular when these activities lead to a significant change
in the price of the financial instrument.
instrument.
•The extent to which orders given or transactions undertaken by persons
with a significant position (long or short) in a financial instrument lead to
significant changes in the price of the financial instrument or related
derivative or underlying asset
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32. Manipulation 2.2
22
1) Orders which produce false signals
2) Orders which secure the price at an abnormal or
artificial level
Factors offering a strong indication: indication:
•Whether orders given or transactions undertaken lead to no change in
beneficial ownership of the financial instrument or which reallocate holdings
among associated companies within a corporate holding.
•The extent to which orders given or transactions undertaken include
position reversals in a short period and represent a significant proportion of
the daily volume, and/or are associated with significant changes in the price
y , g g p
of a financial instrument.
•The extent to which orders given or transactions undertaken are
concentrated within a short time span in the trading session and lead to a
price change which is subsequently reversed.
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33. Manipulation 2 3
2.3
1) Orders which produce false signals
2) Orders which secure the price at an
abnormal or artificial level
Factors offering a strong indication:
•The extent to which orders given change the representation of best bid or
offer prices in a financial instrument, or more generally the representation
of the order book available to market participants, and are removed before
they
th are executed.
t d
•Whether the systematic purchase or sale of a financial instrument affects its
p
price, without symmetric price impact by simultaneous counteracting
, y p p y g
transactions on other markets.
•The extent to which transactions when undertaken at or around a specific
time when reference prices settlement prices and valuations are calculated
prices,
lead to price changes which have an effect on such prices and valuations..
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34. Manipulation 2.4
24
3) Orders which employ fictitious devices or
any other form of deception or contrivance
Factors offering a strong indication:
•Whether orders to trade given or transactions undertaken are preceded or
followed by dissemination of false or misleading disclosure by the same or
or associated persons.
•Whether orders t t d might b given or t
Wh th d to trade i ht be i transactions undertaken b
ti d t k by
persons, and associated persons, before or after they produce or disseminate
research or investment recommendations which are erroneous or biased and
demonstrably influenced by material interest
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35. Manipulation
Manip lation – The Gre Area
Grey
•Journalists (art. 1.2.c)
p j y
•in respect of journalists when they act in their
professional capacity such dissemination of
information is to be assessed,….., taking into account
the rules governing their profession, unless those
persons derive, directly or indirectly, an advantage or
profits from the dissemination of the information in
question.
•Discretion to Member States for self‐regulation
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37. Manipulation s B
Manip lation vs. Buy Back Program
(Art. “The
(A t 8) “Th prohibitions provided f i thi Di ti shall not apply t
hibiti id d for in this Directive h ll t l to
trading in own shares in buy-back programmes or to the stabilisation of
financial instrument provided such trading is carried out in accordance
with implementing measures adopted pursuant to the procedure
referred to in Article 17(2)”
Safe harbour Insider trading
(i.e. Exemption)
Market
Manipulation
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38. Manipulation s B
Manip lation vs. Buy Back Program
CESR/Commission Approach
Allow BBP without jeopardise market
Aims integrity
BBP identification
BBP disclosure
Main issues Potential for Market Abuse
Fair treatment of shareholders
F
Allow flexibilities
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39. Manipulation s B
Manip lation vs. Buy Back Program
BBP identificaton
The safe harbour covers:
•(1) the buying back of shares for the purposes of reducing the
capital of an issuer;
•(2) the buying back of shares to meet obligations arising from
debt financial instruments exchangeable into equity instruments;
•(3) f lfilli
(3) fulfilling obligations arising f
bli ti ii from employee share option
l h ti
programmes and other allocations of shares to employees.
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40. Manipulation s B
Manip lation vs. Buy Back Program
BBP ex ante disclosure
ex-ante
•Prior to the start of trading full details of the programme must be
Prior trading,
published through an officially appointed mechanism in the jurisdictions in
which an issuer has requested that its shares be admitted to trading on a
regulated market. (…) All subsequent changes to the programme must be
g ( ) q g p g
published through the same officially appointed mechanism(s).
bl h d h h h ff ll d h ()
•The issuer must have in place the mechanisms necessary to ensure that it is
able to fulfil trade reporting obligations to the relevant competent authority
and/or market.
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41. Manipulation s B
Manip lation vs. Buy Back Program
Conditions for trading (art 3 draft regulation)
(art.
When executing trades under the programme, an issuer;
•shall not purchase shares at a price higher than either the
price of the last independent trade or the current independent
bid
•may not purchase more than 25% of the average daily volume of
the shares in any one day on the regulated market
market.
•however, in case of extreme low liquidity, the issuer may deviate
from the above mentioned 25% limit provided that the issuer: a)
p )
informs in advance the Competent Authority; b) disclose
adequately its intention; c) does not exceed 50% of the average
daily volume.
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42. Manipulation VS
Manip lation VS. Stabilisation 1
•Stabilisation mean t any purchase or offer t purchase
St bili ti to h ff to h
Relevant Securities, or any transaction in Associated
Securities equivalent thereto by investment firms or credit
thereto,
institutions, which is undertaken in the context of a
Significant Distribution of Relevant Securities (IPO or
secondary public offering) for exclusively securing a market
p
price for such Securities that would not otherwise prevail.
f p
•Activity that is not directly linked to this purpose will not
benefit from the safe harbour.
f f f
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43. Manipulation s
Manip lation vs Stabilisation - Conditions 1
•Stabilisation Period
•Stabilisation shall be undertaken only during a defined period that
has been disclosed to the market in advance.
has been disclosed to the market in advance
•
• Stabilisation Price
Stabilisation Price
•Stabilisation may only be undertaken to support the market price of
the Relevant Securities having due regard to prevailing market
the Relevant Securities having due regard to prevailing market
conditions and in any event may not be executed above the offering
price.
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44. Manipulation vs Stabilisation – Conditions
p
2
•Ex ante disclosure
•The possibility of Stabilisation, together with adequate disclosure
of the risks and other aspects of Stabilisation which could be
f p f
material to an investor’s decision to subscribe for or purchase the
Relevant Securities, must be disclosed.
•The existence and maximum size of any Overallotment Facility or
Greenshoe,
Greenshoe the exercise period of the Greenshoe and any conditions
for the use of the Overallotment Facility or exercise of the
Greenshoe must also be disclosed, as well
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45. Manipulation vs. Stabilisation –
p
Conditions 3
•Post Stabilisation Disclosure
•Within one week after the end of the Stabilisation Period, the
Stabilisation transactions undertaken must b adequately d l d to
bl d k be d l disclosed
the public. This disclosure has to contain the following information:
the date t hi h the Stabilisation
th d t at which th St bili ti period ended;
i d d d
whether or not Stabilisation was undertaken;
the i
th price range b tbetween which St bili ti was undertaken;
hi h Stabilisation d t k
the date at which Stabilisation last occurred.
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46. Manipulation vs Stabilisation – Conditions
p
4
•1. Record k i
d keeping
•Systems must be in place to record Stabilisation
y p
orders and transactions.
•2. The stabilisation manager
•One Investment Firm shall act as central point of
h ll l f
inquiry for any regulatory intervention.
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48. Preventive Measures
Prevention of insider trading
• The protection of investors requires that:
The protection of investors requires that:
they will be protected against the
improper use of inside information;
they are supplied with appropriate,
th li d ith i t
regular information form the issuers of
listed securities to ensure that they are
p
placed on equal footing and remove
q g
information asymmetry.
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49. Preventive Measures: Issuers Disclosure NEW!
– Member States shall ensure that issuers of financial
instruments inform the public as soon as possible of
p p
inside information which directly concerns the said
issuers (art. 6): MISTAKE? INSIDE INFO VS RELEVANT
EVENTS!
– Only for admission on request (art. 9)
– An issuer may under his own responsibility delay the
public disclosure of inside information, such as not to
prejudice his legitimate interests provided that such
omission would not be likely to mislead the public and
provided that the issuer is able to ensure the
id d th t th i i bl t th
confidentiality of that information. (Additional
requirement: inform competent authority without
requirement: inform competent authority without
3/11/2009
delay). Limiting Market Abuse - Bashir Al Nakib 49
50. Preventive Measures: Issuers Disclosure
•Possible legitimate interests for issuers to delay public
disclosure (art. 6 draft directive) (but don’t avoid risks!):
( f )( )
•(1) Matters in course of negotiation, when public
disclosure would be likely to affect the conclusion of a deal
y
or the normal course of negotiations;
•(2) Decisions taken or contracts made by the
management board of an issuer which need the approval
g pp
of the supervisory board in order to become effective,
where the organisation of such an issuer requires the
separation between these boards, provided that such a
public disclosure before the approval would jeopardise the
correct assessment of th i f
t t f the information b th public.
ti by the bli
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51. Preventive Measures: Research (art. 6.5)
( )
•Member States shall ensure that there is appropriate
regulation in place to ensure that persons who produce
l ti i l t th t h d
or disseminate research concerning financial
instruments or issuers of financial instruments
(including recommending or suggesting investment
strategy), intended for distribution channels or for the
public, take reasonable care to ensure that:
– such information is fairly presented, and
– disclose their interests or indicate conflicts of interest
disclose their interests or indicate conflicts of interest
concerning the financial instruments to which that
information relates.
3/11/2009
(Lack of) Coordination with ISD: ancillary service)
Limiting Market Abuse - Bashir Al Nakib 51
52. Preventive Measures Research: Level 2
•“Research and other information recommending g
or suggesting investment strategy” shall mean
– information produced by an independent analyst,
p y p y ,
an investment firm, a credit institution, a rating
agency or an individual employed by them that,
directly or indirectly, expresses an investment
recommendation on a financial instrument or an
issuer of fi
i f financial i t
i l instruments, as well as
t ll
– information produced by others than the persons
referred t above which di tl recommends an
f d to b hi h directly d
investment decision on a financial instrument.
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53. Preventive Measures Research: Level 2
P ti M R h L l
•Standard for presentation of the recommendations
•All Relevant Persons ‐ other than those financial journalists who are
subject to an appropriate and equivalent self regulatory regime ‐ should
take reasonable care to ensure that:
– facts are clearly distinguished from interpretations, estimates,
f y g f p , ,
opinions and other types of non‐factual information;
– all sources are reliable or that, where a source is not considered
reliable, this i clearly i di
li bl hi is l l indicated; d
– all projections, forecasts and price targets are clearly labeled as such
and the material assumptions made in using them are indicated
indicated.
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54. Preventive Measures Research: Level 2
•Specific Rules
•Investment firms, credit institutions and credit rating agencies should take
reasonable care to ensure that:
– all substantially material sources are indicated;
– any basis of valuation or methodology used to evaluate an issuer or financial
instrument is adequately summarised;
– the meaning of any rating category assigned (e.g.buy, sell etc) or
recommendation (e.g. “buy/hold/sell) made, is adequately explained and any
appropriate risk warning indicated;
– reference is made to the planned frequency, if any, of updates of the Relevant
Information and to any major changes in the coverage policy previously
announced (e g a decision to stop coverage);
(e.g.
– the date at which the Relevant Information was first released for distribution
is indicated clearly and prominently, as well as the relevant date and time for
any fi
financial i t
i l instrument price mentioned;
t i ti d
– the most recent change in recommendation or rating issued, if such change
occurred over the previous twelve months, is indicated clearly and
prominently:
i l
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55. Preventive Measures
• Other preventive measures:
•the creation of “insiders’ lists",
•the application of "window trading" to sensitive categories of
personnel,
•the application of internal codes of conduct and
•the establishment of "Chinese walls".
Implementing Measures
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56. Preventive Measures
Insiders’ lists: The directive requires all issuers and third parties
acting on their behalf or for their account with access to inside
g
information to draw up lists of insiders. CESR proposes that those
concerned should maintain lists of persons with access to inside
information together with permanent lists of those who have
i f ti t th ith t li t f th h h
regular access to inside information. These lists should be updated
on a continuous basis to ensure that they are always current
Disclosure of (all) transactions: The directive requires those in
managerial positions within an issuer to disclose dealings in the
shares of the issuer. CESR proposes that this obligation should
cover members of the administrative, management or supervisory
boards of the issuer together with senior managers having similar
decision making capacity within the issuers.
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57. Preventive Measures
Notification of suspicious transactions: The directive
p
requires intermediaries to notify the competent authority
of transactions that they suspect of being abusive.
y p g
CESR proposes that notification should occur once
suspicions are aroused.
p
These persons need not have any evidence.
The notification obligation has to be fulfilled if the person
p
professionally arranging transactions has sufficient
y g g
indications that the transaction might be abusive.
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58. Preventive Measures
• Other measures:
A primary role in the prevention of insider trading is
played by the existence of rules imposing a clear
segregation of functions within investment firms (i e
(i.e.
“Chinese walls”)
−Chinese walls within firms helps:
Chinese
• to ensure that privileged information will not flow or be
disseminated t other d
di i t d to th departments or di i i
t t divisions engagingi
in other activities of projects, and
•To avoid that people working for the other parts of the
firm be considered as holding privileged information and,
as such, be hampered or crippled in their activities.
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