The Financial Conduct Authority continues to emphasise its work in investigating and bringing enforcement action in market abuse cases and the FCA's market abuse jurisdiction extends to markets and financial instruments beyond equities and linked investments. This is the first of six articles on investigations and enforcement by Freshfields Bruckhaus Deringer. This article discusses the extent of the market abuse regime, the FCA's increasing willingness to exercise its market abuse jurisdiction outside of the equities markets, and practical issues for firms to bear in mind as a result of this.
The FCA and its predecessor, the Financial Services Authority, have now had the power to impose civil sanctions for market abuse for over a decade. The overwhelming focus of this power has historically concerned the equities markets and instruments linked to equities. This is perhaps understandable given the relative size of the equities markets and the potential scope for abusive behaviour in relation to them.
This focus on equities in the context of market abuse can make it easy to forget that the market abuse regime extends to a number of other markets and financial instruments, including bonds, commodities and derivatives. There have only been nine final notices in respect of non-equities markets and financial instruments. The first three of these final notices were issued in 2008 and 2009 in respect of insider dealing in the bond markets (Steven Harrison (September 8, 2008), Darren Morton (October 6, 2009) and Christopher Parry (October 6, 2009)). Subsequent final notices have related to the manipulation of coffee futures and options (Andrew Charles Kerr (June 1, 2010)), Brent Crude Futures contracts (Steven Noel Perkins (June 24, 2010)), futures contracts traded on the London Metals Exchange (Jason Geddis (September 20, 2011)), and commodity futures (Michael Coscia (July 3, 2013)).
The most recent of these final notices were published earlier this year, and relate to coffee futures (David Hobbs (February 14, 2014)) and gilts (Mark Stevenson (March 20, 2014)). These are a timely reminder that the FCA is prepared to exercise its market abuse jurisdiction in other markets in appropriate circumstances. The FCA's 2014-15 business plan sets out its continued focus for the year ahead on market abuse, and this could refer to market abuse wherever or however it occurs.
Which markets and investments fall within the scope of the market abuse regime?
The scope of the FCA's market abuse jurisdiction is set out in Part VIII of the Financial Services and Markets Act 2000 (FSMA). Section 118(1) FSMA provides that behaviour can only amount to market abuse if it occurs in relation to:
- "qualifying investments" admitted to trading on a "prescribed market";
- "qualifying investments" in respect of which a request for admission to trading on such a market has been made; or
- in relation to insider dealing or the improper disclosure of inside information, investments which are related investments in relation to such "qualifying investments".
Certain trading on recognised auction platforms (which conduct auctions in EU emission allowances) also falls within the market abuse regime, but this will not be considered further in this article.
The definitions of "qualifying investments" and "prescribed market" are set out in the Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001 (the 2001 Order).
"Qualifying investments" are those listed in Article 1(3) of the Market Abuse Directive (2003/6/EC) (see article 5(1) of the 2001 Order), and include transferable securities, money market instruments, financial futures contracts, interest rate, currency and equity swaps, derivatives on commodities, and any other instrument admitted to trading on a "regulated market" (see below) in a member state or for which a request for admission to trading on such a market has been made.
"Prescribed market" is defined in article 4 of the 2001 Order. Markets established under the rules of a UK recognised investment exchange are "prescribed markets" for all of the seven types of behaviour listed in section 118(2)-(8) FSMA. A current list of these markets can be found on the FCA's register. As at April 2014, the following were UK recognised investment exchanges:
- ICE Futures Limited (offers benchmark energy and emissions futures and options).
- BATS Trading Limited (a pan-European multilateral trading facility providing an alternative market for trading equities and exchange-traded funds that are listed on exchanges such as the London Stock Exchange).
- CME Europe Limited (European derivatives exchange focusing on FX futures products and futures and options based on interest rates, equity indexes, energy, agricultural commodities, metals, weather and real estate).
- ICAP Securities & Derivatives Exchange Limited (London based stock exchange for smaller companies coming to the market for the first time — eligible instruments include equity shares, debt securities, securitised derivatives, options and warrants).
- The London International Financial Futures and Options Exchange (primarily a futures and options exchange (interest rates, equities, options, bonds and agricultural)).
- The London Stock Exchange (this exchange does not solely provide a market for equities, but also for other financial instruments including, for example, bonds, derivatives and structured products).
- The London Metal Exchange (industrial metals trading).
"Regulated markets" as defined in Article 4(1)(14) of the Markets in Financial Instruments Directive (2004/39/EC) are also "prescribed markets" for all of the behaviour listed in section 118 FSMA apart from those at subsection (4) (misuse of information) and (8) (misleading behaviour or distortion). A full list of regulated markets can be found on the website of the European Securities and Markets Authority. As at April 2014 it includes 100 European markets (including some of those listed above). Although this appears to broaden the scope of the market abuse regime a great deal, it should be borne in mind that there are territorial limits on the scope of the market abuse regime (see section 118A FSMA). In particular, behaviour can only amount to market abuse if it occurs in the UK or in relation to a "prescribed market" situated in, or operating in, the UK.
Does the investment in question have to be traded on a "prescribed market"?
Not only is the list of markets and instruments that fall within the scope of the market abuse regime very broad, but the market abuse regime also applies to off-market trading in the relevant investments provided that they are admitted to trading (or a request for admission to trading has been made in respect of them) on a "prescribed market". In other words, it is enough that some of the investments in question are admitted to trading — the actual instruments traded do not have to be.
This was illustrated in the recent Mark Stevenson final notice, which related to Stevenson's manipulation of the UK government gilt market. The trading in question did not take place on an exchange; it took place by way of bilateral off-market transactions through brokers. The FCA decided however that it did have jurisdiction regardless, noting that "Gilts are qualifying investments and despite most of their trading not taking place on exchanges, they are admitted to trading on a prescribed market."
Points to note
It is therefore clear that the market abuse regime is much broader than the historical pattern of published enforcement cases would tend to suggest, and the FCA is only likely to increase its focus on other markets falling within its market abuse jurisdiction in the future. Market abuse is at the most serious end of the conduct that the FCA has the power to investigate, and it is important that firms and their employees fully understand the scope of the FCA's powers in this area and what is and is not acceptable market behaviour in the light of this.
Firms consequently need to ensure that they have dispelled any myths that exist about the scope of the market abuse provisions. This could be done, for example, as part of new joiner training and ongoing compliance training on market conduct. In particular, it should be emphasised that scope of the market abuse regime:
- is not limited to approved persons;
- is not limited to trading equities or instruments linked to equities;
- is not limited to on-market transactions in the relevant investments; and
- is not limited to intentional abusive conduct.