Market Watch 75

The Financial Conduct Authority (FCA) has published a new edition of its Market Watch (No. 75). This latest version deals with market soundings, that is the communication between securities issuers or issuer advisers also referred to as Disclosing Market Participants (DMPs) and potential investors (Market Sounding Recipients (MSRs)) to gauge investor interest in an upcoming security issuance for price discovery and market functioning purposes. The Market Watch comes in response to recent observations of the FCA where MSRs have traded financial instruments subject to a market sounding, after they were contacted for consent to receive the sounding, but before the DMP published any inside information to the MSR. In such cases, MSRs which typically are institutional investors, had no information from the DMP as to the security involved, but found out details on the sounding via other information channels. Such practices raise concerns about MSR’s business practices and the potential misuse of inside information.
Therefore, in this 75th edition of the market watch, the FCA outlines the key provisions on market soundings in the Retained Market Abuse Regulation (UK MAR) and reminds firms of proper conduct in this context.
According to the FCA, the UK MAR establishes formal arrangements for the legitimate disclosure of inside information during market soundings. This includes assessing, recording, and obtaining consent from market sounding recipients (the potential investors) while ensuring sensitive information isn’t unnecessarily disclosed. On the other hand, MSRs are responsible for independently assessing if they possess inside information and are prohibited from using it for trading relevant instruments. In this context, the FCA also refers to the Market Sounding Guidelines of the European Securities and Markets Authority (ESMA) which provide a framework for how MSRs should handle inside information obtained from market soundings.
To minimize the risks of insider dealing and unlawful disclosure, issuing firms and their advisors and market sounding recipients should take some precautionary steps, including the following:
1. Issuing firms and their advisers need to exercise caution when conducting market soundings on financial instruments with limited market participants. This is particularly crucial in cases where external information held by MSRs could potentially identify the financial instrument. It’s advisable for DMPs to assess the information shared at all stages of the sounding to avoid inadvertently disclosing inside information.
2. DMPs should customize their initial communication with MSRs and be vigilant about the risk of unlawfully disclosing inside information. DMPs should evaluate whether the information provided initially is essential for MSRs to make an informed decision to receive the information, tailoring their disclosures according to the nature of the transaction.
3. DMPs should consider specific arrangements and communication scripts when dealing with MSRs who are private individuals, as their awareness of potential breaches may differ from corporate clients.
4. DMPs should carefully evaluate the standardized information they plan to provide to MSRs in their initial communications and consent requests.
It is important to clearly state at the beginning of any market sounding that the communication is indeed a market sounding, providing MSRs the opportunity to decline and reducing the risk of disclosing inside information.
5. MSRs are encouraged to implement ‚Gatekeeper‘ arrangements as recommended in Market Watch 51 and 58. This includes appointing specific compliance teams or staff as the primary point of contact for DMPs. Furthermore, market sounding recipients should ensure that their staff responsible for receiving and processing market soundings are well-trained in relevant internal procedures and the prohibitions on the unlawful use of inside information under the UK MAR.
6. Both DMPs and MSRs should work towards reducing the time intervals between the DMP’s initial communication and the MSR’s consent to minimize the risks of insider dealing associated with delays in consent responses.
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To conclude, the FCA notes that it will not refrain from taking action if it has grounds to believe that the provisions on insider dealing in the UK MAR have been violated.