The FCA has published Market Watch 58 in which it outlines its findings following a review of the industry implementation of the Market Abuse Regulation (MAR). The FCA maintains that confidence in the integrity of markets is a key foundation of markets working well. Market abuse erodes this confidence, increases the costs of trading, and undermines fair competition.
Through meetings, surveys, and analysis of their own data, the FCA found that many market participants have a good understanding of their obligations under MAR and have configured their systems and controls accordingly. Nevertheless, the FCA believes there are still areas where firms are struggling to comply, such as surveillance of orders and transactions. Currently, well over 70% of the STORs the FCA receives are related to insider dealing in equities; however, firms are expected to perform surveillance across all relevant asset classes, including fixed income and commodities. According to the FCA, “Effective compliance with MAR requires strong judgment.” Firms should be confident that their systems can detect and respond to abusive behaviours. Abusive behaviour has many guises, and participants should remain vigilant for new forms, taking into account the characteristics of the financial instruments and markets they are operating in as well as the overarching regulatory obligation to counter the risk of financial crime.
Firms must be able to demonstrate that their approach is responsive to changes to their business, market practice and the regulatory environment. This may include developments in automated trading, encryption technologies, artificial intelligence, and social media.
The FCA also focussed on Market Sounding requirements under MAR, which oblige 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 noted that the introduction of the new rules under MAR had no negative impact, however there is a chance that market conditions (e.g. an increased demand for new issues) might make Market Sounding less necessary. The FCA also recognises the benefit of the ‘gatekeeper’ model – a nominated person for determining whether the firm should receive a market sounding – and how it operates in practice. Flexibility, appropriate training for those involved, and awareness of the obligations under MAR and related guidelines are all critical. Only relevant and necessary information should be shared and record keeping practices must be effective. This includes the consideration of the use of recorded lines, the keeping of sufficient meeting minutes, and ensuring records and explanations of declined wall crossings are maintained.
The FCA’s review indicated that informing market sounding recipients when information disclosed during a sounding ceased to be inside information (‘cleansing’) works well for most transactions. Robust cleansing procedures are crucial in assuring investors that they are able to lift any trading restrictions and in maintaining confidence in the sounding framework. The FCA also advises firms to agree cleansing strategies as early as possible ahead of a transaction.
The FCA noted that the quality of the insider lists it reviewed varies and recommended that participants should be clear on how any insider list is used and ensure its use remains appropriate, with the required controls in place. In case of a request from the FCA, insider lists must be returned within 2 days of a request, and a full chronology must be sent to the FCA within 5 days of the initial request.
Issuers are reminded of the importance of maintaining adequate procedures, systems and controls to comply with their disclosure obligations under MAR, including systems and controls for identifying and disclosing inside information.
With this publication, which follows previous dedicated editions of the Market Watch, the FCA has shown once again how preventing market abuse is at the heart of their supervisory objective, and firms should be mindful of that when reviewing their internal arrangements. Complying with MAR is more than adhering to a set of prescriptive requirements, as Julia Hoggett, Director of Market Oversight at the FCA, stated in a speech delivered on 14 November 2017: “…at its most effective, compliance with MAR is a state of mind”.