What is the Market Abuse Directive?

The Market Abuse Directive (MAD) is a piece of legislation passed by the European Parliament in 2003 to address concerns about market manipulation in the European Union. The directive created guidelines for a common framework to be applied in all member nations for the purpose of clearly defining market manipulation and creating a mechanism for enforcement and penalization. Individual member nations were expected to use the Market Abuse Directive as a blueprint for reforming their own financial systems to create common legislation across the EU.

Under the Market Abuse Directive, two issues of special concern are targeted. The first is insider dealing, the use of information not generally known to the public to profit on trades of securities. Additionally, the directive addresses market manipulation, where traders work to create intentional shifts in the market with the goal of profiting from them. A variety of techniques can be used to interfere with free market operations. Both of these activities eroded consumer confidence and were practiced in a variety of EU nations because there were no specific laws banning them and nothing on the European level to combat them.

Known formally as 2003/6/EC on insider dealing and market manipulation, the Market Abuse Directive defined market abuse activities and ordered EU member nations to address them. One of the key aspects of the legislation was a mandate that each member nation create a single agency for setting and enforcing policy to prevent market abuse, and that these agencies work with agencies in other EU countries to manage cross-border cases. Coordinating efforts across agencies could also be useful for anti-terrorism work.

Some European Union member nations were able to implement the Market Abuse Directive quickly, sometimes with minimal adjustments to their financial systems. Others required more time to create and consolidate agencies, adjust legislation, and take other steps to bring their financial systems into compliance. Consumer confidence improved as a result of creating uniform and standardized legislation, making traders feel more comfortable and increasing economic activities in the European Union.

As with other directives, member nations were required to submit proof of implementation in the form of action plans followed with documentation that these plans were put into effect on a national level. Putting directives into action requires cooperation from legislators, industry experts, and government officials, all of whom work together to develop a framework in accordance with the directive and to put that framework into law.