FCA Addresses Market Soundings Guidance Under Market Abuse Regulations

The Financial Conduct Authority (FCA) this week issued some significant concerns around market abuse, with a particular focus on how market soundings are conducted.

Understanding Market Soundings Under MAR Article 11

Under MAR Article 11, a Market Sounding occurs when a market participant, such as a broker (known as a Disclosing Market Participant (DMP), communicates material, non-public information about an upcoming transaction (such as an equity raising), to a recipient of that information such as an investment house, referred to as a Market Sounding Recipient (MSR). The MSR will indicate to the DMP whether they are willing to participate in the offer, at what price and for what amount. This process allows the DMP and the issuer to gauge the market appetite and, in turn, assess the potential success and pricing of the transaction.

Insider Status and Gatekeeper Responsibilities

Naturally, MSRs are expected to maintain strict confidentiality over this sensitive information. Individuals at the MSRs who receive the information are expected to be ‘wall-crossed’- meaning they become ‘insiders’ and are restricted from trading the securities involved in the market sounding. MSRs are expected to appoint a ‘gatekeeper’, who is responsible for coordinating which individuals within the organization receive the inside information and ensuring they are properly wall-crossed.

However, the FCA has identified instances where DMPs have shared information with a large number of MSRs, or with individuals at an MSR, without obvious control over which individuals were added to the relevant email chains or chatrooms, and whether they had been properly wall-crossed by the gatekeeper. The FCA is concerned that such communication may not follow the requirements set out in Article 11 and might therefore constitute unlawful disclosure of inside information.

Surveillance and Electronic Communications

Since communications around market soundings are often electronic, many financial institutions are relying on their surveillance systems to help track information leakage through the use of key words and phrases, based on the policies of the DMP and MSR.

With respect to Personal Account Dealing (PAD), surveillance also plays an important role in detecting potential regulatory breaches. The FCA notes that “effective PAD controls help make sure firms are managing the risk of market abuse, appropriately handling client confidential information and managing their obligations to identify and report suspicious transactions and orders.” Surveillance helps monitor PAD, especially through alerts for restricted lists and communications.

FCA’s Broader Compliance Expectations

Clearly, the FCA has noted sufficient issues, having observed “firms failing to consider the inherent risks and potential conflicts of interest arising from their smaller size or business model when designing PAD policies and procedures”, going on to say:

Ongoing breaches of PAD policies are unacceptable. These policies and procedures are essential for maintaining market integrity by reducing conflicts of interest and helping to prevent market abuse.  

Firms must implement adequate arrangements to manage these risks, and we saw that the right tone from the top is crucial for embedding a culture of compliance.

For a regulator, this is a notably direct admonition to the industry, and may signal increased scrutiny (and therefore possibly enforcement action) from the regulator moving forward.

Firms must be able to prove strong controls around market soundings, PAD and electronic communications. Compliancentral’s surveillance and communications monitoring solution helps financial institutions capture, secure and analyze sensitive interactions across all channels ensuring that compliance obligations are properly managed and auditable.

For additional information on how Compliancentral can improve your compliance processes, contact us today.