Table Of ContentShariah Principles for Islamic Capital Markets and the Regulation
of Market Abuse in UK and the US: Common Grounds,
Divergences and Proposal for Reform
A thesis submitted to the University of Manchester for the degree of
PhD
in the Faculty of Humanities
2012
Kabir Ahmed
School of Law
1
List of Contents
List of Contents…………………………………………………………………........2
Abstract………………………………………………………………………………7
Declaration…………………………………………………………………………...8
Copyright Statement…………………………………………………………………8
Dedication……………………………………………………………………………9
Acknowledgements………………………………………………………………….10
List of Statutes………………………………………………………………………11
List of Cases………………………………………………………………………....13
List of Abbreviations………………………………………………………………...14
Chapter 1- Introduction
1.1- Introduction……………………………………………………………………..15
1.2- Research Questions …………………………………………………………….24
1.3- Structure of thesis……………………………………………………………….25
Chapter 2- Rationales for Prohibition of Market Abuse
2.1- Introduction……………………………………………………………………..28
2.2- Prohibition of Market Abuse…………………………………………………....28
2.3- Prohibition of Insider Trading…………………………………………………..28
2.3.1- Introduction……………………………………………………………....28
2.4- Insider Trading and the Efficient Pricing of Securities………………………....29
2.4.1-Information and the Stock Market………………………………………...29
2.4.2-The Impact of Insider Trading………………………………………….....30
2.5- Fairness as a Justification for Insider Trading Prohibition……………………...36
2.5.1-Fairness Requires Symmetrical Information to all participants…………..38
2.5.1.1- The Absolute Equality of Information…………………………..38
2.5.1.1- The Equal Access View……………………………………….....44
2.5.2- Fairness Requires No Breach of Fiduciary Duty…………………………46
2.5.3- Fairness Requires No Harm and Preservation of Investors Confidence….47
2.6- Prohibition of Market Manipulation…………………………………………….50
2.6.1- The Ethical Rationales for Prohibition of Market Manipulation ...............50
2.6.2- The Economic Rationales against Prohibition of Manipulation………….58
2
2.7- Conclusion………………………………………………………………………62
Chapter 3- US and UK Law of Market Abuse
Part I - US Law on Market Abuse…………………………………………………..63
3.1- Introduction……………………………………………………………………..63
3.2- The Evolution of Law on Market Abuse………………………………………..63
3.3- The Origins of Federal Prohibition of Securities Fraud………………………...65
3.4- The Current Law on Market Abuse……………………………………………..66
3.4.1- Prohibition under Section 10(b)………………………………………….67
3.5- The Jurisprudence of Rule 10b-(5)……………………………………………...68
3.5.1- Equal Access Theory of Fairness….…………………………………….68
3.5.1.1- Cady Roberts & Co……………………………………………..68
3.5.1.2- SEC v Texas Gulf Sulphur Co………………………………….69
3.5.2- Classical Theory of Fairness…….………………………………………70
3.5.2.1- Chiarella v United States……………………………………….71
3.5.2.2- Dirks v SEC…………………………………………………….71
3.5.3- The Emergence of Misappropriation Theory of Fairness………………..72
3.5.3.1- United States v Newman……………………………………….72
3.5.3.2- United States v Carpenter……………………………………....73
3.5.3.3- United States v O’ Hagen………………………………………75
3.6- Prohibition under Section 14(e) ………………………………………………..76
3.7- Prohibition under Section 16……………………………………………………77
3.7.1- Section 16(a) - Reporting Obligation……………………………………77
3.7.2- Section 16(b) - The Short Swing Profit Rule …………………………...77
3.7.3- Section 16(c) - The Rule against Short Selling………………………….78
3.8- Prohibition of Selective Disclosure and Regulation FD………………………..78
3.9- Conclusion………………………………………………………………………78
Part II – UK Law on Market Abuse………………………………………………...80
3.10- Introduction……………………………………………………………………80
3.11- The Evolution of Law on Market Abuse…..…………………………………..80
3.12- The Current law ……………………………………………………………….82
3.13- The Criminal Law Offences…………………………………………………...83
3.13.1- Insider Dealing …………………………………………………………84
3
3.13.2- Misleading Statements…………………………………………………85
3.13.3- Market Manipulation…………………………………………………...86
3.14- The Regulatory Offences of Market Abuse under FSMA 2000………………87
3.14.1- Insider Dealing ……………………………………………………….88
3.14.2- Improper Disclosure……………………………………………………89
3.14.3- Manipulating Transactions……………………………………………..98
3.14.4- Manipulating Devices………………………………………………….90
3.14.5- Dissemination of Misleading Information….………………………….90
3.15- Offence of Encouraging Market Abuse……………………………………...91
3.16- Conclusion……………………………………………………………………91
Chapter 4- Shariah Principles for Securities Markets
4.1- Introduction……………………………………………………………………..92
4.2- The Origins of Islamic Finance……………….…………………………………93
4.3- Shariah Compliance of Modren Securities Markets...…………………………..94
4.4- The Emergence and Development of Securities Market …………………….....96
4.5- Key Principles and Prohibitions in Securities Markets………………………...101
4.5.1- Achievement of Falah…………………………………………………...104
4.5.2- Socio-economic Justice………………………………………………….106
4.5.3- Distribution of Wealth and Elimination of Exploitation………………...107
4.5.4- Social Solidarity and Egalitarianism…………………………………….109
4.5.5- Prohibition of Interest…… ……………………………………………..110
4.5.6- Prohibition of Gharar………………………………………………….. .114
4.5.7- Prohibition of Maisir…………………………………………………….117
4.5.8- Prohibition of Haram activities………………………………………….123
4.6- Conclusion……………………………………………………………..............124
Chapter 5- Contractual Structure of Financial Instruments in Islamic Capital
Markets
5.1- Introduction……………………………………………………………………125
5.2- Equity Based Shariah Compliant Contractual Structures...……..……………..125
5.2.1- Mudarabah………………………………………………...…………….126
5.2.2- Musharakah……………………………………………………………...128
5.3- Debt Based Shariah Compliant Contractual Structures…...…………………...130
4
5.3.1- Murabaha………………………………………………………………..130
5.3.2- Deferred payment (Bai Bithman Ajil)…………………………………..133
5.3.3- Sukuk…………………………………………………………………....133
5.3.4.1- Sukuk Issuance and Secondary Market………..……………....138
5.4- Hedging and Risk Management in Islamic Capital Market……………………140
5.4.1- Introduction……………………………………………………………...140
5.4.2- Islamic Concept of Risk Management………………………………......142
5.4.3- Islamic Risk Management Products……………………………………..145
5.4.3.1- Bay- Salam……………………………………………………...145
5.4.3.2- Istisna…………………………………………………………...149
5.5- Conclusion……………………………………………………………………..151
Chapter 6- Shariah Perspective of Market Abuse and Prohibition of Abusive
Speculation
6.1- Introduction……………………………………………………………………152
6.2- Philosophical underpinning of Shariah based Market Abuse Framework….....152
6.3- Prohibition of Insider Trading in Islam………………………………………..157
6.4- Prohibition of Market Manipulation in Islam……………………………….....161
6.5- Shariah Compliant Contractual Structures minimises Abusive Spculation …...168
6.6- Equity versus Debt based Products: Does Interest facilitates Abusive Speculation
in Securities Markets? ……………..………………………………………….169
6.7- Shariah Principles and Market Abuse through Derivative Products.………….184
6.7.1- Introduction………..…………………………………………………....184
6.7.2- Non-Shariah Element of Derivatives……………………………………186
6.8- Does Non-Shariah Elements in Derivative Products Facilitate Market Abuse?.187
6.8.1- Deferment of Payment and Delivery Creates Excessive Gharar Leading to
Market Abuse…………………………………………………………....188
6.8.1.1- Shariah Principles Reduce Market Abuse………………………189
6.8.2- Lack of Ownership, Possession and Delivery of Objects Facilitate Market
Abuse…………………………………………………………………… 193
6.8.2.1- Do Short Sales Leads to Market Abuse……...............................196
6.8.2.2- Is there a Shariah Approach to Short sales which can Reduce
Market Abuse?.............................................................................200
6.8.3- Derivative Speculation Contravenes Shariah and Facilitate Market
5
Abuse?.......................................................................................................205
Chapter 7- Critical Evaluations and Conclusion
7.1- Introductions………………………………………………………………….. 224
7.2- Comparison of Rationales of Prohibition of Insider Tradingin UK and US with
Shariah Principles of Shariah…………………………………...…..........................224
7.3- Comparison of Rationales of Prohibition of Manipulation in UK and US with
Shariah Principles …………………………………………...……………………..229
7.4- Conclusion……………………………………………………………………..233
Bibliography……………………………………………………………………….237
6
Abstract
Investor protection is the essence of Islamic banking and capital markets. Shariah
aims to promote fairness in the exchange mechanism, prohibit abuse, exploitation and
harm, protect investors and safeguard public interest. The purpose of this thesis is to
explore and compare Shariah’s principles for investor protection from market abuse
with the rationales and theories of prohibition underpinning the UK and US legal
market abuse framework in securities markets.
Shariah takes a completely different and a very comprehensive approach in combating
market abuse. It takes a two pronged approach. Firstly, it propounds compliance and
incorporation of ethical principles, Quranic proscription, and Prophetic
commandments in the legal framework which prohibit market abuse before it occurs.
Secondly, its unique contractual structures facilitate fair exchange. The product
innovation incorporates ancient contractual structures as building blocks with inbuilt
safety features to curb abusive speculation, manipulation and distortion in the price
formation mechanisms. These principles and contractual structures successfully
safeguarded the interest of participants in one to one transactions in barter based
ancient markets in Mecca and Medina.
The thesis analyses the validity of the aforementioned approach in regulating market
abuse in impersonal trading in the context of emerging technologically advanced
Shariah compliant stock exchanges. It also explores how Shariah’s approach
facilitates the smooth interplay of market forces and uninterrupted natural equilibrium
devoid of exploitation and harm. In the light of the antiquity of Shariah’s ethical
principles and contractual structures and the modern securities markets offering a
sophisticated electronic trading platform, it presents a particularly challenging task to
put together a coherent theoretical Shariah based market abuse framework for the
smooth operation of advanced equity, debt and derivative products.
The thesis also comprehensively analyses the speculative nature of modern equity,
debt and derivative products and illustrates how, in contrast, long standing Shariah
compliant contractual structures provide inbuilt safety features to reduce the potential
for volatility and distortion in the price formation mechanism. It further highlights
non-Islamic features and practices in the conventional spot, forward and futures
markets and illustrates their susceptibility to facilitate abusive and excessive
speculation, distortion and manipulation.
Based on the comparative analysis of the rationales of UK and US market abuse
regimes and Shariah principles, the thesis concludes by highlighting common ethical
approaches, divergences and how Shariah based market abuse approach could be used
to improve the integrity and stability of the UK and US securities Market.
7
Declaration
No portion of this work referred to in this thesis has been submitted in support of an
application for another degree or qualification of this or any other university or
institute of learning
Copyright Statement
1- The author of this thesis (including any appendices and/or schedule to the thesis)
owns any copyright in it (the “Copy right”) and he has given The University of
Manchester the right to use such Copyright for any administrative, promotional,
educational and or teaching purposes.
2- Copies of this thesis, either in full or in extracts, may be only made in accordance
with the regulations of the John Ryland University Library of Manchester. Details of
these regulations may be obtained from the librarian. This page must form part of any
such copies made. Details of these regulations may be only obtained from the
Librarian. This page must form part of any such copies made.
3-The ownership of any patents, designs, trademarks and any and all other intellectual
property rights except for the Copyright (The Intellectual Property Rights) and any
reproduction of copyright works, for example graphs and tables (“Reproductions”),
which may be described in this thesis, may not be owned by the author and may be
owned by the third parties. Such Intellectual Property Rights and/or Reproductions
cannot and must not be made available for use with out the prior written permission of
the owner(s) of the relevant Intellectual Property Rights and or Reproductions.
4- Further information on the conditions under which disclosure, publication and
exploitation of this thesis, the Copyright and any Intellectual Property Rights and/or
Reproductions described in it may take place is available from the Head of the School
of Law and the Dean of Faculty of Humanities.
8
Dedication
To the Eternal Memory of My Father
9
Acknowledgements
The writing of my thesis has been a long journey which would not have been possible
without the support of family, friends and colleagues. I have owed many debts of
gratitude during this time period.
Firstly, I want to thank my Lord who is Merciful, Beneficent and who created such
peaceful circumstances for me to undertake this long course.
I am greatly indebted to my supervisor, Professor Emilios Avgouleas for his un-
wavering support, his mentoring, learned advice and continuous engagement
throughout this time period. His enthusiasm and commitment to excellence is truly
amazing.
I specially thank my sweetheart mother and scholarly father for their life long
commitments, their utmost energies spent in nurturing me, their continuous prayers
and for meeting the expenses of my education. My sincere gratitude also goes to
Touqeer Bhai and Allam sahib, who are no more in this world, but will always be
remembered in my prayers for being so kind and supportive. They enabled me to take
the first baby step towards achieving my educational goals.
None of this would have been possible without the support of my lovely wife. I am
profoundly grateful to her for taking care of my daughter, compromising on all those
missed opportunities to spend time together on vacations and to Amarah who had to
endure an absent minded father at times. I also thank Aunty Amtul-hafiza for her
lovingly cooked food, full of nutritious ingredients.
I would also like to thank my colleagues who made these years much more exciting
specially Vincen, Timothy, Florkin, David, Herbert, Franklin and Craig as well as
Shane, Cecelia, Meemy, Laula, Rachel, Waheed, Farheen, Faheem, Tanzhu, Hani,
Fang Fang, Ouche, and all others who accompanied me in this journey. I hope all of
you go on to have illustrious academic careers.
A special thanks to Jackie and Mary for being so kind throughout these years.
10
Description:Al-Shatibi agrees with the above and regards Maslahah as an overriding Nangi Sardehi, Islamic Capital Markets (2008) VDM Verlag Dr. Muller.
