Expectations of Market Conduct during the Coronavirus Crisis

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The FCA published Market Watch 63 on the 27th May 2020 where they set out their expectations of market conduct in the context of increased capital raising events and alternative working arrangements related to the coronavirus. In addition, and to support the message contained within Market Watch, they also published Primary Markets Bulletin 28.

The FCA has an operational objective to protect and enhance the integrity of financial markets.  The FCA stated that they will continue using their powers to request information and make enquiries where they identify behaviour which is potentially abusive or in danger of creating a disorderly market. They may ask market participants to provide further information on their activities to explain how they are meeting their regulatory obligations. Where necessary, they will use their enforcement powers to take action against those breaching the rules. This is, of course, a common theme in any publication related to the coronavirus.

Key messages

The FCA recognises the uncertainty created by the coronavirus crisis and operational challenges arising from the public policy on social distancing. However, they expect all market participants, including issuers, advisors and anyone handling inside information to continue to act in a manner that supports the integrity and orderly functioning of financial markets. This includes complying with all their obligations under relevant regulation including the Market Abuse Regulation (MAR). The FCA wants to ensure that that the markets remain orderly throughout this period and during this period expect firms to focus on:

  • ensuring inside information continues to be appropriately identified and handled by all persons involved in the information chain so that it is not misused for insider dealing or for commercial advantage;
  • ensuring inside information is appropriately disclosed by issuers so that investors are not misled;
  • maintaining robust market surveillance and suspicious transaction and order reporting (STORs) by relevant market participants, in the context of changes in market conditions and the current use of alternative working arrangements;
  • meeting the transparency and short position covering requirements under the Short Selling Regulation (SSR) for market participants to support the effective functioning of the market; and
  • identifying and managing conflicts of interest by market participants that may arise around capital raising events.

MAR Inside Information obligations

Differences in working practices may lead firms open to different risks when it comes to handling sensitive market data. Market participants need to ensure that they have assessed the market abuse risks. The FCA suggests that one way to mitigate risk is to enforce two week holidays for front office staff.

Issuers and Advisors

The FCA reminds issuers and advisors to maintain adequate procedures, systems and controls to comply with disclosure obligations under MAR. They go on to say that issuers should continue to assess carefully what information constitutes inside information in light of the nature of information due to the impact on businesses and recapitalisation as a consequence of coronavirus. Issuers should consider carefully the information a reasonable investor would now be likely to use as part of their investment decision in the context of coronavirus. The FCA gives examples of information that could have a significant impact on a share price. So, for example, changes in strategy or details on future financial performance, such as funding and access to finance, including through government schemes could have a significant effect on the share price.

Insider Lists

Issuers should continue to meet their obligations to ensure that all staff who have access to inside information are included on insider lists. Issuers remain responsible for insider list obligations under MAR where they delegate maintaining the insider list to a third party.

ESMA’s MAR Q&A questions 10.1/10.2 state that persons, such as advisors, acting on the behalf or account of issuers are also required to maintain and be responsible for the firm’s insider list.

Given the different risks associated with remote working, issuers may want to re-affirm that persons on an insiders lists, continue to be aware that they have access to inside information and the duties in relation to that.

Disclosure of Inside information

Subject to provisions on delayed disclosures, issuers should comply with their MAR obligation to disclose inside information as soon as possible so order that the markets are not misled.  

All market participants – including issuers. advisory, firms and natural persons

Natural persons

The prohibitions on unlawful disclosure and insider dealing apply to natural persons in the situations set out in MAR Article 8(4). In particular, the prohibitions will apply to anyone who knows or ought to know that the information they possess is inside information. Furthermore, it is important to note that information may become inside information when combined with other information held by that person.

Disclosure on a selective basis

Any person handling inside information should ensure that it is only disclosure where disclosure is necessary in the course of their employment, profession or duties. DTR 2.5.7 G provides guidance on possible categories of recipient to whom inside information might be lawfully disclosed.

Market Soundings

“Wall-crossings” play an important role in facilitating capital raising transactions. The FCA reiterates that the inside information which is disclosed and received should be strictly controlled to prevent the risk of unlawful disclosure and insider dealing.

The MAR market soundings regime provides a framework for controlling inside information when market participants undertake wall-crossings.

PA Dealing

In October 2019 Market Watch 62 the FCA shared their concerns regarding personal account dealing (PAD). Given the potentially heightened risks of personal dealing for staff working from home, the FCA state that firms should consider and ensure that they have appropriate controls around PAD per COBS 11.7 and 11.7A, including assessing how conflicts of interest are managed and the risk of market abuse by employees.

Short Selling

The FCA confirmed that they consider that short selling can contribute usefully to liquidity and price discovery but warn that market participants should ensure that they continue to meet their obligations under the SSR. This gives appropriate transparency to short selling activity and supports the orderly functioning of the market.

Restrictions on uncovered short sales in shares

For firms to meet their obligations under SSR, investors must ensure that they only enter into a short sale of a share where they have:

  • Borrowed the share.
  • Entered into an agreement to borrow the share, or
  • Have an arrangement with a third party who confirms that the share has been located. Third parties need to take measures in order to give this confirmation, such as allocating the shares for borrowing or purchase or referring to an easy to borrow list where the conditions set out in ESMA’s Short Selling Q&A are satisfied.

Net Short Selling position reporting

SSR also requires investors who hold significant net short positions to provide certain notifications. Investors need to notify the FCA when they hold a net short position that equals or exceeds 0.1% of the issued share capital of the company and each time the position increases or reduces by 0.1%. This follows ESMA’s decision temporarily to reduce the minimum threshold. Net short positions of 0.5% or over of the issued share capital of a company are publicly disclosed by the FCA on a daily on their website.

Managing conflicts when providing corporate finance facilities

The FCA notes that they have heard reports of a small number of banks failing to treat their corporate clients fairly when negotiating new or existing debt facilities. As stated in their Dear CEO Letter on 28 April 2020, some banks may have used their lending relationship to exert pressure on corporate clients to secure roles on equity mandates that the issuer would not otherwise appoint them to.

Market conduct during credit events

Recapitalisation exercises involve many forms of valuable and legitimate engagement between issuers and their creditors, including those which also hold positions in credit default swaps (CDS).

In June and September 2019 statements, the FCA, alongside the Chairs of the SEC and CFTC, set out their shared concerns regarding “opportunistic strategies” and their adverse impact on the integrity, confidence and reputation of markets. The FCA expects market participants to comply with their obligations under MAR in this area and will continue to monitor and enforce against any breaches identified.

Issuers may wish to consider how creditors’ motivations may be influenced by other financial instruments they hold and how such motivations could affect them.

Market Surveillance

The FCA is well aware that the increased market activity means that there will be increase alerts and as a consequence, an increased workload. Again, firms are reminded to ensure that the systems are working correctly, to make changes where necessary, to reflect any increased risk, and considered reviewing the system output at a later date.

What firms need to do to ensure that they remain compliant 

  • Carry out risk assessments to ensure that the correct controls are in place
  • Ensure that insiders are aware of their regulatory and legal obligation
  • Keep insider lists up to date
  • Consider the type of information that could be considered inside information, as the nature of this has changed due to the coronavirus
  • Disclose information to the market in line with MAR
  • In relation to market soundings, disclosing market participants should maintain appropriate records of their interactions, for example, through recorded lines or written minutes. Receiving participants should assess whether the disclosure includes inside information and be aware of their obligations around being prohibited from trading on that information and keeping it confidential
  • In Market Watch 58 and Market Watch 51, the FCA recognised the benefit of a gatekeeper model, as a contact point for soundings, controlling the receipt and internal dissemination of soundings, and firms may want to consider this
  • Keep records of any decision reached in disclosures of inside information, as the FCA has stated that they will want to see these if they feel a wrong decision has been made by a firm
  • Ensuring recipients are aware that the information that is being disclosed to them is inside information
  • Firms should continue to assess whether procedures, systems and controls that they have in place in relation to insider information are compliant as set out in Market Watch 60.
  • Ensure that the PA Dealing of staff is being monitored and relevant Management Information regarding this is reported to the Board in a timely manner
  • Ensure that short selling notifications are made in line with the revised regulation
  • Review market abuse risks and ensure that systems and reports are calibrated to flag any new or emerging risks
  • Consider a thematic review or retrospective analysis to ensure that surveillance systems worked in parity with the risks established within the firm, for market abuse

Help and advice

If your firm requires any assistance in understanding the implications of the coronavirus on in relation to the requirements under MAR, please do not hesitate to contact us.