FCA Signals Continued Focus on Market Abuse with Market Watch 58

The FCA has published another Market Watch on market conduct and transaction reporting issues, hot off the heels of versions 56 (issued in September) and 57 (issued in November). With three sets of communication issued in just over three months, the FCA appear to be increasing its focus on this topic in an attempt to improve standards and ensure that the UK has a clean, orderly and transparent market in which participants can trust.  This is especially apparent as the recent stream of communications from the FCA in Q4 2018 follows little new guidance or clarity from the FCA during the rest of 2018, aside from the consultation and subsequent enactment of the updates to the Financial Crime Guide, which also took effect in December. In this latest Market Watch, the FCA publishes findings from its review of the industry’s implementation of the Market Abuse Regulation (MAR), which included meetings with firms, surveys sent to issuers and asset managers and analysis of its own data.

In general, they found that many market participants have a good understanding of their obligations, however there are areas which present challenges, including surveillance of all orders and transactions. Quote surveillance technology was in its infancy when MAR came into force, but given the lapse of time since July 2016, the FCA now expect firms to be fully in compliance. The FCA also took this opportunity to reiterate the message from Market Watch 56 that surveillance “is a multi-asset exercise” and should not be limited to equities.

A large portion of the update was focused on the Market Sounding requirements which are formalized in MAR. The Market Sounding rules require disclosing market participants (DMPs) to obtain consent of the person receiving the sounding to receive inside information, inform the recipient of the prohibition on the use of the information and keep records of the information given and to whom. DMPs are obliged to keep written minutes of communications, which are to be agreed by both parties.  The FCA stated that they “did not observe any impact on the ability of issues to raise capital on UK markets following the introduction” of the regime, which is a positive message. However, the regulator did note that their review coincided with market conditions where a high demand for new issues and low interest rates,  were rendering market sounds less necessary. So their statements are caveated with the fact that the regime may not truly have been stress-tested thus far.

Nevertheless, the FCA recognized the benefit of the ‘gatekeeper’ model – a nominated person for determining whether the firm should receive a market sounding, and how it will operate in practice. It was encouraged that caution be applied to ensure flexibility, as well as delivery of appropriate training for those involved.

Additionally, where models are depending on the gatekeeper seeking additional guidance from portfolio managers regarding whether they want to accept the sounding or not. The FCA also highlighted that only information necessary to inform the decision regarding whether to proceed should be shared. Importance was also placed on record keeping. This includes the consideration of the use of recorded lines, the keeping of sufficient meeting minutes, and ensuring records of declined wall crossings are also maintained.

The FCA also found that the majority of firms are satisfied with the ‘cleansing’ processes (whereby information ceases to be confidential and is communicated to holders), however advised that cleansing strategies are agreed in advance to alleviate any confusion.

Following this latest commentary, firms would be wise to review their market sounding procedures, and refresh any staff training to ensure they are able to identify and control inside information appropriately.

Commentary regarding issuers and their processes around insider lists was also provided. The FCA highlighted the importance of making sure these lists are maintained using the prescribed template and available in a timely fashion when requested. The use of permanent insider lists was discussed, and can be valuable when used appropriately, but the FCA warned these should not be disproportionally large.

Lastly, comment is provided in relation to credit events, including a warning issued by the FCA, echoing Andrew Bailey’s speech at Bloomberg earlier this year and publications from the CFTC.  This outlines that where behaviours appear to involve intentional or ‘manufactured’ events they may constitute market abuse. While the conduct identified so far has not directly impacted on the UK, if where market participants are considered to be on ‘the wrong side of the line’, the FCA will look to take “swift and effective action”. Firms operating actively in these markets should take heed of this warning and ensure they have sufficient processes in place to prohibit participation in such events.

How We Help

We offer a range of market abuse solutions, including market abuse controls reviews that encompass an examination of relevant policies and procedures, evaluation of the robustness of your firms’ monitoring, an assessment of your surveillance techniques and interviews with non-compliance staff members designed to assess the effectiveness of the internal market conduct controls and the overall culture of the firm.

Our Market Abuse Surveillance Solution can also help in this area. The technology provides automated in-depth trade surveillance to help identify items of interest and non-compliant trading and investment activity. The system offers a case management tool that can track and store emails, reports, and research related to each investigation.

Download ACA’s guidance on the UK’s market abuse regime