Financial Services Bulletin - Market Abuse: The New Regime

Key Points At A Glance

This article analyses:

the purpose of the market abuse regime;

the key elements of market abuse (must relate to qualifying investments traded on a relevant market, the three conditions -misuse of information, false or misleading impressions or distortion, and the regular user test);

the role of the FSA's Code of Market Conduct and the concept of safe harbours.

Market Abuse - The New Regime

Purpose of the Market Abuse Regime

It is important to step back from the legal framework and consider the fundamental policy objective behind the market abuse regime. The objective is to ensure as far as possible that the market operates fairly and cleanly and as a result to enhance the integrity, transparency and competitiveness of the UK's financial sector. Market abuse undermines the confidence of market participants, whether professional or retail, and damages the reputation of the market.

Essence of Market Abuse

Market abuse occurs in three principal ways. Each is characterised by a market user being unreasonably disadvantaged (directly or indirectly) by other market users who:

use to their own advantage information which is not generally available; or

create a false or misleading impression; or

distort the market.

Market Abuse Under the FSMA - Key Elements

1. Behaviour must occur in relation to qualifying investments traded on a relevant market; and

2. the behaviour must satisfy one of the following three conditions:

   the behaviour must be based on information not generally available to those using the market but which if available to a regular user of the market would be regarded by him as relevant when deciding the terms on which transactions in investments of the kind should be effected; or

   the behaviour must be likely to give a regular user of the market a false or misleading impression as to the supply of or demand for or as to the price of investments of the kind in question; or

   a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question; and

3. the behaviour must be likely to be regarded by a regular user of that market as a failure on the part of the person or persons concerned to observe the standard or behaviour expected of a person in his or their position in relation to the market.

   Qualifying Investments and Markets

   The principal qualifying investments are:

   Deposits;

   Contracts of insurance;

   Shares;

   Instruments creating or acknowledging indebtedness;

   Government and public securities;

   Instruments giving entitlements to investments;

   Certificates representing certain securities;

   Units in a collective investment scheme;

   Rights under a stakeholder pension scheme;

   Options;

   Futures;

   Contracts for differences.

   The qualifying markets are (currently):

   Coredeal Limited;

   The International Petroleum Exchange of London Limited;

   Jiway...