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United Kingdom: Financial Conduct Authority issues new guidance on market soundings

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In brief

The Financial Conduct Authority (FCA) has issued important new guidance on receipt of market soundings in the latest edition of Market Watch, the FCA’s newsletter on market conduct issues.

The FCA’s Market Watch 75 newsletter reminds buy-side firms (Market Sounding Recipients or MSRs) that they have an obligation to independently assess whether they possess inside information from a market sounding that would prohibit them from trading.

This is nothing new. One point that the FCA is particularly focused on, however, is what happens during the period following an issuer or sell-side firm (a Disclosing Market Participant or DMP) contacting the MSR to ask whether they consent to receive a market sounding and the point at which the MSR then places a trade in the issuer’s securities.

The issue

  • The FCA has recently observed cases where MSRs have traded relevant financial instruments during the period after a DMP sought their consent to receive a sounding but before the DMP disclosed the inside information.
  • Even where DMPs did not initially disclose the identity of the financial instruments or the nature of the proposed transaction, MSRs were still able to identify those details using other information available to them.
  • Frequently, this has occurred where there has been a delay between DMPs requesting the MSR’s consent to a sounding and the MSR giving it.
  • In these instances, MSRs have provided rationales that are not easily reconcilable with the circumstances of the trading. For example, an MSR selling a financial instrument immediately after a DMP has sought its consent to receive inside information and then buying the same quantity of the financial instrument back in the subsequent placing does not reconcile with ‘Rebalancing a portfolio.’
  • The FCA’s concern is that MSRs may, in practice, have other information available to them that allows them to identify, with reasonable confidence, the financial instruments referred to before they consent to receiving inside information, giving them an unfair advantage.

What firms can do

There are a few helpful points that come out of the newsletter:

  • At the point that a DMP asks whether an MSR consents to receiving a market sounding, the MSR must look at the information it already has on the issuer to determine whether it is now in receipt of inside information.
  • For example, when an issuer has previously held regular and similarly sized funding rounds executed by the same advisory firms or where an MSR holds a very small number of investments in its portfolio, the MSR might be able to identify the issuer.
  • MSRs should consider putting in place “Gatekeeper” arrangements, i.e., appointing specific teams or staff in Compliance as the first point of contact for DMPs – these arrangements are highlighted in Market Watch 51 and 58.
  • Staff who receive and process market soundings must be properly trained.
  • DMPs and MSRs should consider minimising time intervals between the DMP’s initial communications and requests for consent and the MSRs consenting to such requests. Reducing this time period will help minimise the risks of insider dealing.
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Author

Caitlin McErlane is a partner in Baker McKenzie’s Financial Services & Regulatory Group in the London office. Caitlin's practice focuses on advising a range of global financial institutions on complex and high value regulatory matters. She advises banks, major corporates, payment institutions and asset managers on navigating UK and EU financial services regulation. She has particular experience in advising clients on regulatory implementation projects, day-to-day compliance issues, and regulatory issues arising in the context of large-scale transactions. She also expertise in the areas of banking and wholesale financial markets regulation, in particular in the FX and fixed income space, alongside experience advising market infrastructure providers, including major international exchanges, trading platforms, clearing systems and payment services providers, on a variety of compliance issues. Caitlin is also a member of the Baker's ESG and sustainability taskforce, and advises a range of clients on the drafting and implementation of ESG policies and the implications of becoming a signatory to the UNPRI and the Stewardship Code. Caitlin is an authority on regulatory reforms in the sustainability space and sits on a number of trade association working groups. She has recently been interviewed by Climate Action on her work and is a frequent speaker on the subject.

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