Jeffrey Elway
Other
Senior Counsel
Article
9
The Financial Conduct Authority (FCA) published 'Market Watch 75' on 31 October 2023, in which the FCA shared its observations about market soundings since the publication of Market Watch 51 and Market Watch 58. The FCA’s concerns relate to cases of trading by Market Sounding Recipients ("MSRs") during the period after Disclosing Market Participants ("DMPs") initially seek consent of the MSRs to receive the sounding, but before the DMPs disclose the inside information.
Market soundings are interactions between issuing companies and investors to help gauge the interest of potential investors in a transaction to help set their price, size and structure. By their nature, market soundings can involve the communication of inside information.
The UK Market Abuse Regulation ("UK MAR") provides formalised arrangements for issuing companies and their advisers acting as DMPs, to legitimately disclose inside information where the disclosure is made in the normal exercise of a person's employment, profession or duties (the so-called 'safe harbour), including standardised arrangement and information requirements to ensure that no potentially sensitive information is unnecessarily disclosed. The FCA has set out the requirements that DMPs must follow for inside information to be deemed to be 'legitimately disclosed' under the market sounding regime, which include:-
Under UK MAR, MSRs must also independently assess if they possess inside information from the market sounding which would prohibit them from trading – and such assessment should include any other information the MSR has. This might include the MSR being able to identify the issuing company if it e.g. holds a very small number of investments in its portfolio.
The FCA says that it has observed cases where MSRs have traded in relevant financial instruments during the period after the initial communication from a DMP or the DMP has sought the MSR's consent to receive the market sounding and inside information, but before the DMP has disclosed the inside information. The DMPs may not, during the initial communication, have disclosed the identities of the financial instruments or the nature of the proposed transaction and the likelihood of it taking place However, MSRs were still able to identify those details using other information available to them. In such circumstances, the MSRs could have an unfair advantage that is similar to that after the consent process. Frequently, this has occurred where there has been a delay between DMPs requesting the MSR's consent and the MSRs giving it.
The FCA go on to state that the rationale provided by the MSRs to explain the trading in these instances was not easily reconcilable with the circumstances of the trading. As an example, an MSR selling a financial instrument immediately after a DMP had sought its consent to receive inside information, then buying the same quantity of the financial instrument back in the subsequent placing, does not reconcile with 'Rebalancing a portfolio', nor does this rationale reconcile easily with instructions to trade being phrased with urgency.
The FCA has provided some safeguards that DMPs and MSRs may want to implement to mitigate these risks of insider dealing and unlawful disclosure:-
In light of the serious consequences of falling foul of the procedures market participants should take the opportunity to fully evaluate their market sounding procedures. DMPs should take particular care in respect of financial instruments that are thinly traded and where potential external information held by MSRs could reasonably be used to identify the relevant financial instrument.
If you have any questions about the article, or require further information, please contact Jeffrey Elway.
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