Neatly a week ago the Committee on Economic and Monetary Affairs of the European Parliament almost unanimously approved the revised EU legislation on market abuse, including criminal sanctions.
For now on, market insiders and bankers who ride roughshod over regulations or break European laws can be jailed for market abuse.
What is it: an attempt to fight insiders and manipulators or an attempt to put the blame for the latest economic crisis on the European banking system alone? Let’s try to answer this question together…
Insiders Hunted After 2008 Crisis
According to Eugene Olkhovsky, ’s leading expert in financial markets from Canada, the legislators say that insider trading and market manipulation are major violations of the European law. The minimal penalty is 5 years in prison. The reasons and motives are obvious.
In particular, one of the major reasons for the amendment was the scandal when several major banks were busted for manipulating the LIBOR. For reference, the London Interbank Offered Rate is the interest rate banks charge to lend to each other.
In particular, Barclays, Citigroup, Deutsche Bank, HSBC, JP Morgan, RBS and UBS were accused of being involved in interbank manipulation and insider collusion during the period 2007-2010. Several countries around the globe, including the USA, Japan, Canada, Great Britain and the EU started investigations in 2010. These banks were accused of manipulating credits ($10 000bn) and derivatives ($350 000bn). Sanctions were applied to some of the suspects before the investigation was over. In particular, the British financial regulator fined Barclays £290 million while the CEO of Barclays had to resign.
However, the LIBOR scandal is not the only case of such financial abuse. From now on, the EU law treats any such crime as a felony, including manipulating currency exchange rates like EURUSD, EURCHF, EURJPY etc.
In October 2011, Market Leader wrote about Raj Rajapatnam’s case. He used to be the world’s major insider and the founder of Galleon. He was sentenced to 10 years in prison and a $10 000 000 fine.
In November 2010, American prosecutors started an investigation against several major financial and consulting firms as the FBI raided their offices in effort to find evidences of insider trading. Each news release on the matter published in The Wall Street Journal resulted in the companies’ stocks losing their value, thereby raising panic in the market.
According to MIG Bank, it was then that analysts started anticipating major changes in legislation. Many of them started blaming insiders for the 2008 global economic and financial crisis as authorities around the globe started hunting them.
However, some experts say that insider trading and market manipulation are the consequences, not the reasons for the instability in the global banking system. The level of pre-crisis lending was so high that banks deprived themselves of liquidity and later stooped to insider trading and market manipulation.
Anyway, European legislators believe that it was market manipulation and insider trading that provoked the latest global financial crisis. The major problem was impunity. The say that without legislation toughening, Europe may have turned into a real heaven for financial criminals, including insiders and market manipulators.
Ultimate Goal
Despite the fact that the banks involved in the LIBOR scandal are punished, the image of the entire global banking system (and the European banking system in particular) is severely damaged. Therefore, it would be quite logical to suppose that the recent measures are mainly aimed at restoring the image of the banking system.
However, some experts are afraid that legislation toughening may become a populist measure in response to social expectations. They say this may well become a selective weapon in the world of unfair competition.
Moreover, now European politicians have a perfect opportunity to put the blame for the latest crisis on various insiders, manipulators and other unfair representatives of the European and global banking systems. That is why the initiative looks controversial…
