The UK’s Financial Conduct Authority has shared its observations relating to the market soundings regime within the UK Market Abuse Regulation (MAR) in its latest Market Watch newsletter.
Having robust market sounding controls in place offers protection to firms from the risk of committing market abuse, as was seen in 2012, when David Einhorn and Greenlight Capital Inc were both fined by the UK regulator.
The FCA has observed that Market Sounding Recipients (MSRs) have traded the relevant financial instruments having had an initial communication with Disclosing Market Participants (DMPs). Although the DMPs had not specifically disclosed the identities of the financial instruments to the MSRs, the MSRs were still able to identify those details using other information available to them.
One example involved an MSR selling a financial instrument in the secondary market, then buying the same quantity of the same financial instrument back in a subsequent placing, potentially at a discount. It’s not clear how similar this example is to when two bond traders, Darren Morton and Christopher Parry were publicly censured for market abuse by the UK regulator in 2009.
The FCA is concerned that in some instances MSRs could have an unfair advantage over other market participants even before they have agreed to receive inside information. To help minimise this and other associated risks, the FCA helpfully sets out several ideas and sound processes that would constitute best practice, including the suggestion that DMPs assess the scripts they use at all stages of the sounding.
Given the serious consequences for firms and market participants that get this wrong, this Market Watch newsletter is an essential read for both sell-side and buy-side firms.
Kaizen’s integrated surveillance solution allows firms to identify both legitimate market soundings and potential abuses of this process, and then track the trading activity of those receiving the information.