The FSA published Market Watch No. 30 on 19 November 2008. The newsletter reports on the FSA's thematic review of the firms' policies relating to market rumours and the interaction between credit default swaps and the market abuse regime. We give an overview of these two sections of the newsletter below.
Market Watch No. 30 also reports on the regulatory issues that arise where UK based trading platforms want to allow intermediary firms to offer clients direct access to their markets through a system known as "sponsored access".
In Market Watch No. 26 published in April 2008 the FSA announced that it had begun a review of firms' policies relating to market rumours. Market Watch No. 30 sets out the FSA's findings in the following three main areas:
1) Firms' policies on rumours: firms' should adopt formal guidelines and policies on handling rumours. Such policies shall include:
- a definition of market rumours;
- a clear prohibition on originating rumours;
- a clear prohibition on spreading rumours about competitors to win new business;
- limitations on whom and in what circumstances rumours can be passed on with appropriate disclaimers;
- internal procedures that need to be adhered to (including compliance/senior management involvement when acting on the basis of or communicating rumours);
- a warning that in nervous and volatile markets extra caution needs to be taken when handling rumours.
If rumours are passed on (inside or outside a firm) the origin of the rumour should be sourced where possible, the information should be clearly stated to be a rumour, no additional credence or embellishment should be given to the rumour and it should be clearly stated that the information is unsubstantiated/ not verified.
2) Training and communication of policies: formalised training programmes help place handling of rumours higher on the compliance agenda and ensure staff learn about any new policies and measures that are put in place. Senior management should emphasise the importance of training in this area and remind staff about the need to comply with rules on handling rumours. This is particularly important in nervous and volatile markets, when both the opportunity for and the adverse impact of spreading rumours increase.
3) Monitoring firms' communications and trading: monitoring trading activities as part of firms' general surveillance practices is a strong tool in the fight against market abusive behaviour. A helpful summary of industry best practice on handling rumours is set out on page 9 of Market Watch No. 30.
Credit default swaps and the market abuse regime
The FSA indicates that it sometimes receives questions as to whether credit default swaps (CDSs) are caught by the UK market abuse regime. The FSA states that although CDSs are not admitted to trading on a prescribed market, most CDSs are likely to be caught by the UK market abuse regime. For example, CDSs will be caught by the insider dealing and disclosure of inside information provisions where they are 'related investments', that is investments whose price or value depends on that of a qualifying investment.
View Market Watch No. 30 (13 page pdf).