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About this book

This authoritative textbook offers a thorough, theoretical and practical overview of the current EU legal framework applicable to capital markets. It is intended to enable a critical analysis of the overall regulatory principles as well as the interaction between market actors and EU law which has shaped the regulatory agenda both at national and EU level. The book gives an overview of the foundations of EU capital markets and touches upon issuer disclosure obligations, inappropriate market practices and gatekeepers. EU law is the main focus, complemented by comparative analysis where applicable, primarily relating to UK, French and German laws.

Ideal for upper-level undergraduate or graduate law students taking a module in Capital Markets Law, Securities Regulation, Corporate Finance Law or EU Company Law. Also useful for accounting, business or economics MSc students who need to broaden their understanding of the legal aspects of capital markets, and for academics and policy makers.

Table of Contents

Introduction to the Law of Capital Markets in the EU

Frontmatter

Chapter 1. The Foundations of the Law of Capital Markets in the EU

Abstract
This chapter aims to provide an overall analysis of the historical foundations of capital markets legislative initiatives at the EU level, bringing us up to the most recent legislative initiatives. By following the evolution of the EU legal framework in this area, the analysis will touch on the market, political and legislative landmarks that were crucial to shaping the current regulatory spectrum. After a brief explanation of the first legislative approach at the EU level (1979–1999), this chapter will analyse the Financial Services Action Plan (FSAP) (1999), as well as the Lamfalussy report (2000), which gave birth to the most crucial EU (minimum and maximum) harmonization trends with a series of Directives and Regulations coming out in the following years.
Konstantinos Sergakis

Chapter 2. Markets, Participants and Financial Instruments

Abstract
Capital markets bring together different types of market participants, such as listed companies, individual investors, institutional investors, financial intermediaries and others. Our analysis aims to give a holistic view of the coexistence of capital markets and the various actors and available financial instruments for trading. Moreover, we will explain the basic components of market choices made by listed companies (admission to trading of their shares, as well as market exit strategies), investors (growing reliance on institutional investor schemes) and financial intermediaries (asset owners, asset managers, etc.) in today’s markets. This analysis will highlight participants’ incentives and explain how their agenda seeks to minimize incidents of market failure.
Konstantinos Sergakis

Chapter 3. Supervision and Enforcement

Abstract
Driven by the ramifications of the global financial crisis, EU capital markets law has made important progress in enriching and increasing the sophistication of supervision mechanisms for the safeguard of market integrity, as well as the prompt detection of irregularities or infringements of the applicable legal framework. This chapter gives an overview of the European financial supervisory scheme, tracing its roots back to the global financial crisis. It will then focus on the current EU supervisory model in capital markets, namely the European Securities and Markets Authority (ESMA) and its relationship with national competent authorities (NCAs). Particular importance will be given to the powers acknowledged to ESMA under a series of arguments that prevailed after the financial crisis broke out, and which justify the regulatory and political choice to create ESMA. NCAs are still the key players in supervision, under ESMA’s overall coordination, but ESMA has also been given direct and centralized supervisory powers at the EU level in certain specific cases, such as the supervision of credit rating agencies. Our analysis will also touch on the cooperation between NCAs themselves and with ESMA, not to mention the relevant provisions in EU legislative texts that seek to make the supervisory system and overall EU cooperation more efficient.
Konstantinos Sergakis

Listed Companies and Disclosure Obligations

Frontmatter

Chapter 4. Prospectus Disclosure Obligations

Abstract
Prospectus disclosure obligations are the first cornerstone for the regulatory framework for listed companies. When shares are admitted for trading on a regulated market for the first time (or additional new shares are issued), an important ‘informational contact’ is triggered with underwriters, analysts and (mostly institutional) investors. At this stage of entry to the primary market, transparency and accessibility of information are necessary so that investors can make informed investment decisions. This contact involves the publication of a prospectus. As the main informational vehicle, a prospectus includes various types of information related to the issuer’s financial situation, its prospects and any other element that may be relevant to the investment decision-making process.
Konstantinos Sergakis

Chapter 5. Periodic Disclosure Obligations

Abstract
Periodic disclosure obligations give particular importance to the notion of informational transparency, whereby listed companies are subject to market evaluation on an ongoing basis, based on various reports that must be published at specific times. EU law has undoubtedly taken careful consideration of the market’s need to receive information about issuers on an ongoing basis following the prospectus disclosure obligations (analysed in Chapter 4), which constitute the first heavily regulated informational release to the general public in a listed company’s life. EU rules have therefore focused on introducing informational requirements that should coexist harmoniously with companies’ business size, pace of operations and decision-making processes, while ensuring a fair, accurate and comparable context to the benefit of regulators and market actors interested in periodic information.
Konstantinos Sergakis

Chapter 6. Episodic Disclosure Obligations

Abstract
We have examined how issuers must disclose information to the market on specific occasions, such as prospectus (Chapter 4) and periodic obligations (Chapter 5). However, the demand for informational symmetry and transparency is incumbent on issuers at all times, and not just at the predetermined time frames applicable to prospectuses and periodic publications. Episodic disclosure obligations fill in this gap by requiring issuers to disclose to the public ‘as soon as possible’ any ‘inside information’ that directly concerns them. Episodic obligations are needed since market actors should not wait for the predetermined times when information must be disclosed, such as prospectus and periodic transparency obligations. The reinforcement and harmonization of those obligations in EU law has undoubtedly affected episodic disclosure obligations that aim to maintain an informational equilibrium outside any predictable time frame. The instantaneity of the disclosure obligation, as well as the need to maintain constant informational symmetry between issuers and the rest of the market, makes these EU legal rules crucial for achieving price efficiency and protecting investors.
Konstantinos Sergakis

Chapter 7. Transparency of Ownership Structures

Abstract
An efficient legal framework for capital markets must address issuers’ capital structure in order to secure an adequate level of transparency not only on an issuer’s internal aspects (such as financial information), but also on the issuer’s relationship with its shareholders and with other companies in cases of takeovers. EU and international capital markets are constantly evolving with numerous ongoing ‘buy/sell’ transactions. These transactions inevitably affect the composition of issuers’ capital structures, as well as their control by shareholders, by allowing new investors to participate and existing shareholders to divest. All capital movements must be constantly visible to existing and potential shareholders as well as regulators. As we have already seen, becoming a publicly traded company entails constant informational exposure to the public at large: changes in the capital structure may become valuable informational signals as to a share’s value, the attractiveness of a particular issuer, the general developments in a particular sector and the potential shifts in the issuers’ control.
Konstantinos Sergakis

Inappropriate Market Practices and Market Integrity

Frontmatter

Chapter 8. Insider Dealing

Abstract
Insider dealing is one of the most emblematic and controversial issues in the market abuse regulatory agenda. Numerous theoretical and empirical rationales have been put forward for the legitimization or the prohibition of insider dealing. Nowadays, it is commonly accepted that insider dealing is a harmful activity in capital markets that should be prohibited because it destabilizes market integrity and hampers investor confidence. Nevertheless, the legal response to insider dealing has not always been sophisticated enough to tackle its complexity and technicalities. After several decades of a rather timid legal approach, EU law has attempted to introduce a minimum common framework to combat insider dealing and, with more recent reforms, it has now introduced a uniformly adopted, sophisticated and widely applicable framework that can be viewed as a positive step forward.
Konstantinos Sergakis

Chapter 9. Market Manipulation

Abstract
Market manipulation has a long series of consequences upon markets. It affects price formation mechanisms by subjecting them to illegal practices which aim to destabilize the market while generating profit from price fluctuations (of the manipulated financial product or other related products) and moving security prices in a certain direction. The interference with the formation of prices also damages market integrity with regard to volatility which, increased by such strategies, can reduce liquidity and make markets less trustworthy and subject to systemic crises. Undoubtedly, at the heart of all these consequences stands investor confidence, which is adversely affected by market manipulation, with possible long-lasting deleterious effects on market viability. It is necessary to ensure that investors remain confident in the price formation mechanism which, despite its imperfections and unpredictability, represents the conventional wisdom of investment risk, commonly understood as a ‘supply and demand game’. Determining what constitutes manipulation may be a delicate task since many strategies can appear excessively risky but do not actually amount to market manipulation, merely representing ordinary trading practices. As EU law currently stands, manipulative practices are based on three large categories: manipulative transactions, dissemination of false or misleading information, and benchmark manipulation.
Konstantinos Sergakis

Chapter 10. Short Selling

Abstract
One of the most criticized activities in capital and financial markets, short selling has been subject to a stringent EU regulatory framework since 2012, following the well-known and widely publicized incidents related to sovereign credit default swaps, combined with the collapse of major financial services firms. Regulatory bodies intervened due to market stability concerns, reflecting the popular (mis)conception of short selling’s detrimental effects on market functioning and stability. Inherently experimental, politically driven and, according to empirical studies, counterproductive, temporary bans nevertheless acted as a temporary antidote to further market volatility and fears of potentially destructive ramifications. As a result of this general mistrust of short selling activities combined with market destabilization risks, short selling practices became an ideal scapegoat, justifying further intervention in response to constantly growing public outrage about greed in the capital and financial markets.
Konstantinos Sergakis

Gatekeepers

Frontmatter

Chapter 11. Investment Firms

Abstract
Investment firms can indirectly become important gatekeepers in capital markets since they offer, among many things, access to financial products (by trading on behalf of their clients) and advisory services to investors. They are therefore well placed to offer high-quality services to enable their clients to make informed decisions and to have access to various products. By performing their role efficiently, they can channel investment towards issuers by safeguarding the efficient allocation of resources and market liquidity. It is their unique position between investors and issuers that grants them a gatekeeping function and places them under a strict regulatory framework to protect investors from unqualified, inefficient or fraudulent investment firms. Not all investors have the same level of understanding, knowledge and capacity to buy or sell shares, and many will inevitably use investment firms’ services. It is therefore crucial to guarantee a series of requirements that pertain to the optimal functioning of investment firms and the quality of their services.
Konstantinos Sergakis

Chapter 12. Financial Analysts

Abstract
Financial analysts have traditionally been regarded as gatekeepers in capital markets as their task is to gather and analyse information related to issuers and to assist market actors in their future investment decisions. Their presence and importance in the market is undoubtedly due to the fact that market actors are not in a position to decipher the plethora of available information and need to rely – to some extent – on various service providers who act as intermediaries, such as financial analysts. As information intermediaries, financial analysts are expected to act in the best interests of their clients and of the market at large so as to function as an additional gatekeeper that, on the one hand, makes investors aware of investment opportunities and, on the other hand, exerts a monitoring pressure upon issuers.
Konstantinos Sergakis

Chapter 13. Credit Rating Agencies

Abstract
Credit rating agencies (hereinafter CRAs) have undoubtedly become key players in capital and financial markets due to the pivotal role of their activities for the creditworthiness of the various entities (companies, States, etc.) whose debt is subject to their evaluation. The information they provide has clearly shown its impact on various market actors since they function as informational intermediaries between the rated entities and the rest of the market interested in deciphering the quality of their debt. To highlight their importance even further, we must bear in mind that in the past decades they have also functioned as providers of ‘regulatory licences’ due to the ever-growing regulatory reliance on their ratings. Indeed, regulators chose to issue a series of criteria in order to recognize certain CRAs for regulatory purposes in an effort to discharge the inevitably complex task of constant verification of the quality of the ratings used by various market actors. This regulatory over-reliance made credit ratings even more important since the main focus was thereby shifted (unfortunately) to their regulatory accreditation – and their ensuing prestige – rather than their quality per se.
Konstantinos Sergakis

Chapter 14. Proxy Advisors

Abstract
The important role that proxy advisors have already developed in the USA (Institutional Shareholder Services, Glass Lewis, etc.) and even more recently in Europe (Ethos, Proxinvest, European Corporate Governance Service, etc.) seems to be an inevitable effect of the extreme difficulty that institutional investors face when seeking to ascertain and decipher complex corporate governance strategies. Several resolutions submitted for a shareholders’ vote attest to the need for shareholders to fully understand business opportunities, sophisticated management decisions, and the overall impact of their vote on both a company’s financial position and the performance of their portfolio investment. Given the current investment framework, marked by the ever-increasing emergence of institutional shareholders and transnational investment strategies, it has become essential to rely on proxy advisors in order to evaluate resolutions and vote accordingly in an accelerated and cost-saving framework.
Konstantinos Sergakis
Additional information