FCA Market Watch 75
The Financial Conduct Authority (FCA) has recently published its latest Market Watch newsletter, issue 75, with a focus on Market Soundings.
In summary, the FCA has some concerns around occurrences of trading taking place during the market soundings procedure. They have noted cases where Market Sounding Recipients (MSRs) have traded the relevant financial instruments after a Disclosing Market Participants (DMPs) has initially communicated with them, but before inside information has been disclosed.
The FCA accepts that DMPs are not disclosing details of the inside information within their initial communications, they are, however, concerned that MSRs might have access to additional information which could allow them to identify, with some confidence, the financial instruments being referred to. This is most likely to occur where there is a delay between the DMP requesting the consent and the MSR giving it.
Where MSRs are able to discern this information, they may have an unfair advantage in the market, and they should assess whether they possess inside information before undertaking any trading. Whilst DMPs are protected against the unlawful disclosure of inside information by the market sounding regime, MSRs remain subject to the prohibitions on using that information in both UK Market Abuse Regulation (MAR) and Part V of the Criminal Justice Act 1993. If they were found to be trading on any inside information from a market sounding they would have no protection.
Many firms are now employing a ‘Gatekeeper’ arrangement (also covered in Market Watch 51 and 58) whereby a specific team or compliance officer is the first point of contact for DMPs. This places a separation between the initial request by the DMP and the MSR, and reduces the risk of the MSR acting on the information before a response to the sounding has been given.
In conversations with firms who utilise Cytec’s Insidertrack for Advisors Market Sounding module, many are seeing an increase in the occurrence of the ‘Gatekeeper’ arrangement suggesting firms have been taking the FCA’s concerns seriously.
The FCA has also suggested that DMPs may want to review and update the communication scripts they use at all stages of the sounding process. This again is something we have noted firms implementing, with many updating their communication templates within the system to ensure no information is being inadvertently shared.