MAR Market Conduct

Part

MAR Market Conduct

Printed on: 15/10/2024

Rulebook at: 01/12/2004

Chapters

MAR 1 The Code of Market Conduct
MAR 2 Stabilisation
MAR 3 Inter-Professional
Conduct
MAR 4 Endorsement of the Takeover Code
MAR 5 Alternative Trading Systems
Transitional Provisions and Schedules

MAR 1

The Code of Market Conduct

MAR 1.1

Application

01/12/2004

MAR 1.1.1

The Code of Market Conduct ("the Code") is made under section 119 of the Act which requires the FSA to produce a code giving guidance on what does and does not amount to market abuse. This Code is relevant to all persons seeking guidance as to whether or not behaviour amounts to market abuse.

01/12/2001

APPLICATION: WHAT?

MAR 1.1.2

Part VIII of the Act (Penalties for market abuse) contains provisions relating to market abuse which are described in this Code as the market abuse regime.

01/12/2001

MAR 1.1.3

The three tests in the Act which must be satisfied in order to establish that behaviour (see MAR 1.3), whether by one person alone or by two or more persons jointly or in concert, amounts to market abuse are as follows:

(1) the behaviour must occur in relation to a qualifying investment traded on a prescribed market (see MAR 1.11);
(2) the behaviour must satisfy one or more of the three conditions identified in section 118(2) of the Act (market abuse), the text of which is set out below:

(a) "the behaviour is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected" (section 118(2)(a) of the Act) (see MAR 1.4);
(b) "the behaviour is 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 or value of, investments of the kind in question" (section 118(2)(b) of the Act) (see MAR 1.5);
(c) "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" (section 118(2)(c) of the Act) (see MAR 1.6); and

(3) the behaviour must be likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in the position of the person in question (see MAR 1.2 and MAR 1 Annex 4 (Frequently asked questions))

01/08/2002

MAR 1.1.4

Under section 123(1) of the Act, the FSA has the power either to impose a penalty, or to make a statement to the effect that a person has engaged in market abuse, if the FSA is satisfied that a person ("A"):

(1) has engaged in market abuse; or
(2) by taking or refraining from taking any action has required or encouraged another person to engage in behaviour which, if engaged in by A, would amount to market abuse.

01/12/2001

MAR 1.1.5

In accordance with section 123(2) of the Act, the FSA cannot impose a penalty if there are reasonable grounds for it to be satisfied that a person:

(1) believed on reasonable grounds that his behaviour did not amount to market abuse; or
(2) had taken all reasonable precautions and exercised all due diligence to avoid engaging in market abuse.

01/12/2001

MAR 1.1.6

In accordance with section 123(2) of the Act, the FSA cannot impose a penalty if there are reasonable grounds for it to be satisfied that a person:

(1) believed on reasonable grounds that his behaviour had not required or encouraged another person to engage in behaviour which, if engaged in by the first person, would have amounted to market abuse; or
(2) had taken all reasonable precautions and exercised all due diligence to avoid requiring or encouraging another person to engage in behaviour, which, if engaged in by the first person, would have amounted to market abuse (see ENF 14.5).

01/12/2001

APPLICATION: WHERE?

MAR 1.1.7

Under section 118(5) of the Act, behaviour will fall within the scope of the market abuse regime if it occurs in relation to qualifying investments which are traded on a prescribed market which is located in the United Kingdom or which is accessible electronically in the United Kingdom. (See MAR 1.11 for more detail on qualifying investments traded on a prescribed market.)

01/12/2001

PURPOSE AND EFFECT

MAR 1.1.8

The Code gives guidance for the purpose of determining whether or not behaviour amounts to market abuse, in accordance with section 119 of the Act.

01/12/2001

MAR 1.1.9

The Code does not have the effect of modifying or extending any disclosure obligations, including under the Listing Rules, the Takeover Code and SARs or which apply in relation to any prescribed market.

01/12/2001

MAR 1.1.10

The Code also describes behaviour that, in the opinion of the FSA, does not amount to market abuse. Section 122(1) of the Act (Effect of the code) provides that such behaviour is to be taken conclusively, for the purposes of the Act, as not amounting to market abuse. The relevant sections of the Code are identified by the letter "C" and they are referred to in the Code as "safe harbours". (See MAR 1.4.20 C, MAR 1.4.21 C, MAR 1.4.24 C,MAR 1.4.26 C, MAR 1.4.28 C, MAR 1.5.24 C, MAR 1.5.25 C, MAR 1.5.27 C, MAR 1.5.28 C and MAR 1.6.19 C.)

01/12/2001

MAR 1.1.11

In accordance with section 122(2) of the Act, some of the provisions of the Code identified by the letter "E" may be relied upon so far as they describe behaviour which, in the opinion of the FSA, amounts to market abuse. In addition, in accordance with section 119(2)(c) of the Act, other provisions in the Code identified by the letter "E" describe factors that, in the opinion of the FSA, are to be taken into account in determining whether or not behaviour amounts to market abuse.

01/12/2001

MAR 1.1.12

Explanatory guidance is provided in relation to some provisions of the Act and this Code. This guidance is indicated by the letter "G". It does not form part of the Code, but it is guidance made under the FSA's general power to give guidance as set out in section 157 of the Act (Guidance).

01/12/2001

MAR 1.1.13

The Code is not an exhaustive list of all types of behaviour which may, or may not, amount to market abuse, nor of all the factors to be taken into account in determining whether behaviour amounts to market abuse. The FSA may, subject to appropriate consultation, alter or replace the Code at any time.

01/12/2001

MAR 1.1.14

The Act provides certain statutory exceptions in relation to the market abuse regime (see MAR 1.7).

01/12/2001

MAR 1.2

The regular user test

01/12/2004

MAR 1.2.1

A regular user is defined in section 118(10) of the Act as 'in relation to a particular market, a reasonable person who regularly deals on that market in investments of the kind in question.' Behaviour will amount to market abuse only where it would be likely to be regarded by a regular user as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market.

01/12/2001

MAR 1.2.2

In determining whether behaviour amounts to market abuse, it is necessary to consider objectively whether a hypothetical reasonable person, familiar with the market in question, would regard the behaviour as acceptable in the light of all the relevant circumstances.

01/12/2001

MAR 1.2.3

In determining whether behaviour falls below the standards expected, the regular user is likely to consider all the circumstances of the behaviour, including:

(1) the characteristics of the market in question, the investments traded on that market, and the users of the market;
(2) the rules and regulations of the market in question and any applicable laws. For example, it is likely that it will be relevant to consider the extent to which the behaviour is in compliance with the rules of the particular market and if the person is based overseas it may be relevant to consider the extent to which the behaviour is in compliance with the standards prevailing in that overseas jurisdiction;
(3) prevailing market mechanisms, practices and codes of conduct applicable to the market in question;
(4) the position of the person in question and the standards reasonably to be expected of that person at the time of the behaviour in the light of that person's experience, level of skill and standard of knowledge. For example, the standards which it would be reasonable to expect of a retail investor are likely to differ from those to be expected of an industry professional; and
(5) the need for market users to conduct their affairs in a manner that does not compromise the fair and efficient operation of the market as a whole or unfairly damage the interests of investors.

01/12/2001

MAR 1.2.4

The regular user is likely to consider it relevant, although not determinative, that the behaviour conforms with standards that are generally accepted by users of the market. Detailed guidance is given at MAR 1.4 MAR 1.6 as to the different types of behaviour that would not be regarded as acceptable.

01/12/2001

MAR 1.2.5

The statutory definition of market abuse does not require the person engaging in the behaviour to have intended to abuse the market. Accordingly it is not essential for such an intention or purpose to be present in order for behaviour to fall below the objective standards expected. However, in some circumstances the determination of whether behaviour falls short of those standards will depend on the purpose of the person in question (for example, MAR 1.6.4 E). In those circumstances, the regular user is likely to consider the purpose of the person in question in addition to the other relevant considerations listed at MAR 1.2.3 G. This need not be the sole purpose but should be an actuating purpose.

01/12/2001

MAR 1.2.6

A mistake is unlikely to fall below the objective standards expected where the person in question has taken reasonable care to prevent and detect the occurrence of such mistakes.

01/12/2001

MAR 1.2.7

The objective standard of behaviour expected by the regular user is likely to vary to some degree across markets according to the characteristics of the market in question and the investments concerned. For example, the disclosure standards currently expected in equities markets differ from those expected in commodities markets. Consequently, different standards currently apply to the use of non-public information in different markets. Further, the standard expected of a person will vary with the experience, level of skill and standard of knowledge that the regular user is likely to expect from a person in that position. For example, when assessing the standards to be expected of public sector bodies, it is likely that it will be relevant to take into account their statutory and other official functions.

01/12/2001

MAR 1.2.8

It may often be appropriate to take into account the extent to which the behaviour is in compliance with other applicable rules including the rules of a prescribed market, the Takeover Code or FSA rules. Compliance with such rules may not be sufficient for the behaviour not to amount to market abuse, since those rules may not be specifically directed at the types of behaviour prohibited by the Act or because compliance with those rules is only one consideration among others. Greater weight is likely to be given to compliance with a rule that expressly requires or permits particular behaviour. However, this will not in itself be determinative. Similarly, failure to comply with a rule will not of itself create a presumption that there has been market abuse. If the prescribed market or the Takeover Panel has granted a dispensation from, or given guidance in advance on, its rules, this is likely also to be a relevant factor in considering whether the behaviour amounts to market abuse. As mentioned at ENF 14.9.3 G the FSA will attach considerable weight to the views of the Takeover Panel in interpreting and applying the Takeover Code and the SARs. (See MAR 1 Annex 4 (Frequently asked questions))

01/08/2002

MAR 1.2.9

Where a person's behaviour occurs on an overseas market, but has an impact on a prescribed market, the regular user is likely to consider that it will be relevant to have regard to the local rules, practices and conventions prevailing in the relevant market, and whether or not the person is in the United Kingdom. However, compliance with such rules will not of itself be determinative.

01/12/2001

MAR 1.2.10

As stated in MAR 1.2.4 G, it is likely to be relevant to consider whether to take into account the extent to which the behaviour conforms with standards that are generally accepted by users of the market, but again this will not in itself be determinative. Such standards will be acceptable where they promote the fair and efficient operation of the market as a whole and do not unfairly damage the interests of investors. In circumstances where there is a range of practices which are generally accepted by users of the market, each practice is to be judged objectively on its own merits.

01/12/2001

MAR 1.2.11

The FSA does not anticipate that divergences between standards that are generally accepted by users of the market and the standards expected by the regular user will be frequent. In future, the FSA may identify a practice which is accepted in the market, but which, in the FSA's opinion, is likely to fall short of the standards expected by the regular user. In such cases the FSA will consider whether to signal its views on the practice in the form of guidance (making use of its power to do so under section 157 of the Act), or through some other statement, or by revising the Code, or to take enforcement action. The FSA recognises that the former approach will often be more appropriate, and where this is the case the FSA will work with relevant market participants and regulatory bodies (including the RIEs) to address the causes of concern. However, for those occasions where the appropriate response will be to take enforcement action, the FSA's enforcement policies in relation to market abuse as set out at ENF 14 will be relevant. (See MAR 1 Annex 4 (Frequently asked questions))

01/08/2002

MAR 1.2.12

The FSA is satisfied that the rulebooks of the prescribed markets do not permit or require behaviour which amounts to market abuse.

01/03/2003

MAR 1.2.13

The Code is not exhaustive in its descriptions of behaviour that does or does not amount to market abuse. In circumstances where a person is proposing to undertake an innovative transaction, he should consider it in the light of the guidance provided in sections MAR 1.4 - MAR 1.6. It is also open to a person to consider seeking guidance from the FSA in respect of the proposed behaviour. Similarly, members of an RIE may wish to seek guidance from the relevant exchange on the consistency of the behaviour with exchange rules.

01/12/2001

MAR 1.3

Behaviour

01/12/2004

MAR 1.3.1

The types of behaviour which come within the scope of the market abuse regime include, but are not limited to, the following:

(1) dealing in qualifying investments;
(2) dealing in commodities or investments which are the subject matter of, or whose price or value is determined by reference to, a qualifying investment (in this case, the commodity will be a 'relevant product' in relation to the qualifying investment);
(3) arranging deals in respect of qualifying investments;
(4) causing or procuring or advising others to deal in qualifying investments;
(5) making statements or representations or otherwise disseminating information which is likely to be regarded by the regular user as relevant to determining the terms on which transactions in qualifying investments should be effected;
(6) providing corporate finance advice and conducting corporate finance activities in qualifying investments; and
(7) managing investments which are qualifying investments belonging to another.

01/12/2001

MAR 1.3.2

Behaviour includes both action and inaction. For example, inaction may amount to market abuse in circumstances where a person is under a legal or regulatory obligation to make a particular disclosure and fails to do so.

01/12/2001

MAR 1.4

Misuse of information

01/12/2004

MAR 1.4.1

Statements in this section to the effect that behaviour 'amounts to market abuse' assume that the test in MAR 1.1.3 G (1) has also been met.

01/12/2001

MAR 1.4.2

Section 118(2)(a) of the Act defines behaviour based on misuse of information as:
'behaviour which is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected'.

01/12/2001

MAR 1.4.3

In all prescribed markets, market users rely on the timely dissemination of such relevant information as they may reasonably expect to receive. Those who possess relevant information ahead of general dissemination should, therefore, refrain from basing their behaviour on that information and from requiring or encouraging others to engage in behaviour until it is disseminated, save in the circumstances set out in MAR 1.4.20 C - MAR 1.4.31 C. Otherwise, the confidence of market users in the ability of the market to ensure access to such information will be undermined. The extent to which market users may reasonably expect to have access to information differs between different markets. This is explained further below at MAR 1.4.12 E to MAR 1.4.16 G.

01/12/2001

BEHAVIOUR WHICH AMOUNTS TO MARKET ABUSE

MAR 1.4.4

Behaviour will amount to market abuse (unless MAR 1.4.20 C - MAR 1.4.31 C apply) in that it will be a misuse of information where a person deals or arranges deals in any qualifying investment or relevant product where all four of the following circumstances are present:

(1) the dealing or arranging is based on information. The person must be in possession of information and the information must have a material influence on the decision to engage in the dealing or arranging. The information must be one of the reasons for the dealing or arranging, but need not be the only reason;
(2) the information must be information which is not generally available. Criteria for determining whether information is generally available are set out in MAR 1.4.5 E;
(3) the information must be likely to be regarded by a regular user as relevant when deciding the terms on which transactions in the investments of the kind in question should be effected. Such information is referred to in this Code as 'relevant information'. Factors which are to be taken into account when determining whether information is relevant information are set out in MAR 1.4.9 E to MAR 1.4.11 E;
(4) the information must relate to matters which the regular user would reasonably expect to be disclosed to users of the particular prescribed market. As explained further below at MAR 1.4.12 E and MAR 1.4.13 E, this includes both matters which give rise to such an expectation of disclosure or are likely to do so either at the time in question, or in the future.

01/12/2001

(A) INFORMATION WHICH IS GENERALLY AVAILABLE (MAR 1.4.4E(2))

MAR 1.4.5

Information is treated as generally available if it can be obtained by research or analysis conducted by or on behalf of users of a market (section 118(7) of the Act). In addition, information is to be regarded as generally available where one (or more) of the following is satisfied:

(1) the information has been disclosed to a prescribed market through an accepted channel for dissemination of information or otherwise under the rules of that market;
(2) the information is contained in records which are open to inspection by the public;
(3) the information has otherwise been made public, including through the Internet, or some other publication, or is derived from information which has been made public;
(4) the information can be obtained by observation.

01/12/2001

MAR 1.4.6

People are free to use information that they have obtained through research, analysis or other legitimate means. Legitimate means include the observation of a public event. Observation of a public event includes any information which is discussed in a public area or can be observed by the public without infringing rights of privacy, property or confidentiality. Such information will be considered generally available. The fact that in practice other users of the market cannot obtain the information because of limitations in their resources, expertise or competence does not mean that the information cannot legitimately be obtained.

01/12/2001

MAR 1.4.7

Examples of information which might be obtainable through legitimate research include:

(1) information which is available only overseas and has not been published, or otherwise been made available to the public, in the United Kingdom; and
(2) information which is only available on payment of a fee.

01/12/2001

MAR 1.4.8

For example, if a train passes a burning factory and a passenger calls his broker using his mobile telephone to sell shares in the factory's owner, that passenger will be acting on information which is generally available, since it is information which has been obtained by legitimate means through observation of a public event.

01/12/2001

(B) RELEVANT INFORMATION (MAR 1.4.4E(3))

MAR 1.4.9

Whether, in a particular case, a particular piece of information would, or would be likely to, be regarded as relevant information by the regular user will depend on the circumstances of the case. In making such a determination, the regular user is likely to consider the extent to which:

(1) the information is specific and precise;
(2) the information is material;
(3) the information is current;
(4) the information is reliable, including how near the person providing the information is, or appears to be, to the original source of that information and the reliability of that source;
(5) there is other material information which is already generally available to inform users of the market; and
(6) the information differs from information which is generally available and can therefore be said to be new or fresh information.

01/12/2001

MAR 1.4.10

In the case of information relating to possible future developments (which do not currently give rise to an expectation of disclosure (MAR 1.4.4 E (4)), the following additional factors are to be taken into account when determining the relevance of that information (see example in MAR 1.4.18 E):

(1) whether the information provides, with reasonable certainty, grounds to conclude that the possible future developments will, in fact, occur; and
(2) the significance those developments would assume for market users given their occurrence.

01/12/2001

MAR 1.4.11

Examples of relevant information include the following:

(1) where the qualifying investment in question is issued by a company, or is a derivative relating to a qualifying investment issued by a company, information concerning the business affairs or prospects of the company or a related company;
(2) where the qualifying investment is a derivative relating to a commodity, information or events affecting the deliverable supply of the commodity, such as, for example, information as to the business operations of major suppliers; and
(3) information as to official statistics, and fiscal and monetary policy announcements before they are announced.

01/12/2001

(C) INFORMATION WHICH A REGULAR USER WOULD REASONABLY EXPECT TO BE DISCLOSED TO OTHER USERS OF THE MARKET (MAR 1.4.4E(4))

MAR 1.4.12

Information will only fall within MAR 1.4.4 E (4) if it is either:

(1) information which has to be disclosed in accordance with any legal or regulatory requirement (referred to as "disclosable information"); or
(2) information which is routinely the subject of a publicannouncement although not subject to any formal disclosure requirement (referred to as "announceable information").

01/12/2001

MAR 1.4.13

In the case of information relating to possible future developments (MAR 1.4.4 E (4) and MAR 1.4.10 E), which may lead to a disclosure or an announcement being made, the following additional factor is to be taken into account when determining whether the information is to be treated as disclosable information or as announceable information, namely whether the information provides, with reasonable certainty, grounds to conclude that the possible future developments will, in fact, occur and accordingly that a disclosure or announcement will, in fact, be made (see example in MAR 1.4.18 E).

01/12/2001

MAR 1.4.14

Examples of disclosable information include:

(1) information which is required to be disseminated under the Takeover Code or SARs on, or in relation to, qualifying investments traded on a prescribed market;
(2) information relating to officially listed securities which is required to be disclosed under the Listing Rules;
(3) information which is required to be disclosed to a prescribed market under the rules of an RIE.

01/12/2001

MAR 1.4.15

Examples of announceable information include:

(1) information which is to be the subject of official announcement by governments, central monetary or fiscal authorities or regulatory body (financial or otherwise, including exchanges);
(2) changes to published credit ratings of companies whose securities are qualifying investments or relevant products; and
(3) changes to the constituents of a securities index, where the securities are qualifying investments or relevant products.

01/12/2001

MAR 1.4.16

Examples of information that would not be announceable information include surveys or research based on information generally available, for example, CBI surveys and MORI opinion polls.

01/12/2001

(D) EXAMPLES

MAR 1.4.17

An example of behaviour which falls within MAR 1.4.4 E occurs where a person deals, on a prescribed market, in the equities of XYZ plc, a commodity producer, based on information concerning that company which is not generally available, which is relevant information and which is disclosable or announceable information in relation to the equity market. If the information is also relevant information in relation to a commodity futures contract traded on a prescribed market, dealing in that futures contract based on the information will amount to market abuse only if the information is also disclosable or announceable in relation to the commodity futures market. More generally, where information is required to be disclosed to market A, dealing or arranging deals in qualifying investments traded on A, or in other related products, based on the information will amount to market abuse where this occurs prior to the disclosure being made. Where market A is an equity market, related products will include derivatives and other investments related to the equity in relation to which the disclosure is to be made. Where the information is also relevant to market B, dealing or arranging deals in relation to qualifying investments traded on market B, or in other related products, based on the information will only amount to market abuse where disclosure obligations exist in relation to market B.

01/12/2001

MAR 1.4.18

An example of information which falls within MAR 1.4.4 E (4) arises in connection with the obligation of an officially listed company to announce any major new developments in its sphere of activity which may lead to substantial movement in the price of its listed securities. This could include, for example, entering into a significant contract with a major supplier. In that case, the obligation arises at the time of entering into the contract and disclosure is required to be made without delay. This falls within the category of information set out in MAR 1.4.4 E (3) and MAR 1.4.4 E (4). However, subject to meeting the tests in MAR 1.4.12 E, the information will fall within MAR 1.4.4 E (3) and MAR 1.4.4 E (4) at an earlier stage: namely at the time at which there are grounds to conclude, with reasonable certainty, that the contract will be entered into and that disclosure of the contract will have to be made. Any dealing based on that information in the securities (or investments related to the securities) at that earlier stage would amount to market abuse.

01/12/2001

SAFE HARBOURS

MAR 1.4.19

MAR 1.4.20 C, MAR 1.4.21 C, MAR 1.4.24 C, MAR 1.4.26 C, MAR 1.4.28 C and MAR 1.4.31 C each set out descriptions of behaviour that does not amount to market abuse in that the behaviour does not constitute a misuse of information (see MAR 1.4.4 E).

19/07/2001

(A) DEALING OR ARRANGING REQUIRED FOR OTHER REASONS

MAR 1.4.20

Dealing or arranging deals will not amount to a misuse of information if the dealing or arranging was required in order to comply with a legal (including contractual) or regulatory obligation in circumstances where the obligation existed before the relevant information was in the person's possession.

01/12/2001

(B) DEALING OR ARRANGING NOT BASED ON INFORMATION

MAR 1.4.21

Dealing or arranging deals will not amount to a misuse of information if the person's possession of relevant information that is not generally available did not influence the decision to engage in the dealing or arranging in question.

01/12/2001

MAR 1.4.22

It will be presumed for the purposes of MAR 1.4.21 C that the person's possession of the information in question did not influence his decision to deal or arrange deals if:

(1) the person had taken a firm decision to deal or arrange deals before the relevant information was in the person's possession; and
(2) the terms on which the person had proposed to enter into the transaction(s) did not alter after the receipt of the information.

01/12/2001

MAR 1.4.23

Where a person is an organisation and where one or more individuals within the organisation are in possession of relevant information, it will be presumed for the purposes of MAR 1.4.21 C that such possession had no influence on the person's decision to deal or arrange deals if none of the individuals in possession of the information:

(1) had any involvement in the decision to engage in the dealing or arranging; or
(2) behaved in such a way as to influence, directly or indirectly, the decision to engage in the dealing or arranging; or
(3) had any contact with those who were involved in the decision to engage in the dealing or arranging whereby the information could have been transmitted.

01/12/2001

MAR 1.4.24

Relevant information does not influence the decision to deal or arrange deals if:

(1) the information in question was held behind an effective Chinese wall and the individual or individuals who dealt or arranged deals was or were on the other side of the Chinese wall (see further COB 2.4); or
(2) arrangements equivalent to effective Chinese walls had been established and maintained in respect of the information, and the individuals who dealt or arranged deals did not, therefore, have access to the relevant information.

01/12/2001

MAR 1.4.25

See also MAR 1.7.3 E (2) which discusses a further safe harbour in relation to Chinese walls.

01/12/2001

TRADING INFORMATION

MAR 1.4.26

Dealing or arranging deals will not amount to a misuse of information solely because it is based on information as to that person's intention, or any other person's intention, to deal or arrange deals in relation to any qualifying investment, or information concerning transactions that have taken place. However, this safe harbour does not include dealing or arranging deals:

(1) based on information as to a possible takeover bid;
(2) based on information relating to new offers, issues, placements or other primary market activity.

01/12/2001

MAR 1.4.27

While dealing or arranging deals which is based on trading information will not constitute market abuse, it may constitute a breach of COB 7.4.3 R (Dealing fairly and in due turn) or rules in COB 7.13 (Personal account dealing) applicable to firms. Specifically, MAR 1.4.26 C does not legitimise the front running of customer orders.

01/12/2001

(D) FACILITATION OF TAKEOVER BIDS AND OTHER MARKET OPERATIONS

MAR 1.4.28

Dealing or arranging deals will not amount to a misuse of information if it is engaged in by a person (or someone acting for him) or by another person acting in concert with him in circumstances where:

(1) the dealing or arranging deals was:

(a) in connection with the acquisition or disposal of an equity stake in a company;
(b) engaged in for the sole purpose (see MAR 1.4.30 E) of making the acquisition or disposal; or
(c) where engaged in by a concert party of a person making or potentially making an acquisition or disposal for the sole benefit of that person; and

(2) the information in question consists of one or more of the following matters:

(a) that investments of a particular kind have been or are to be acquired or disposed of, or that their acquisition or disposal is under consideration or the subject of negotiation;
(b) that investments of a particular kind have not been or are not to be acquired or disposed of;
(c) the number of investments acquired or disposed of, or to be acquired or disposed of, or whose acquisition or disposal is under consideration or the subject of negotiation;
(d) the price (or range of prices) at which investments have been, or are to be, acquired or disposed of, or the price (or range of prices) at which the investments whose acquisition or disposal is under consideration, or the subject of negotiation, may be acquired or disposed of;
(e) the identity of the persons involved, or likely to be involved, in any capacity in an acquisition or disposal;
(f) in the case of a takeover bid any information legitimately obtained by the bidder in relation to the target company.

19/07/2001

MAR 1.4.29

For example, in the context of a takeover bid the following instances of dealing or arranging deals will fall within MAR 1.4.28 C:

(1) seeking from holders of securities irrevocable undertakings or expressions of support to accept an offer to acquire those securities (or not to accept such an offer);
(2) making arrangements in connection with an issue of securities where those securities are to be offered as consideration for the takeover offer or to be issued in order to fund the takeover offer, including making arrangements for the underwriting or placing of those securities and any associated hedging arrangements by underwriters or placees;
(3) making arrangements to offer cash as consideration for the takeover offer as an alternative to securities consideration.

19/07/2001

MAR 1.4.30

A person should not be prevented from acquiring an equity stake in a company with a view to pursuing a takeover bid or engaging in other forms of market operations simply because he knew that he would be making a bid, and the knowledge amounted to relevant information. For example, a bidder (including a potential bidder), and those who act for him and his associates, may deal in the target company's shares for the purpose of building a stake in the target company or take other steps in connection with a proposed takeover, such as seeking irrevocable undertakings from shareholders or making arrangements for an issue of consideration shares. However, this does not mean that a bidder may undertake any other type of transaction in the target company's shares, or in other investments (for example, contracts for differences or securities of other companies) in relation to which the information is relevant information. For example, a bidder will be engaging in market abuse if he enters into transactions in qualifying investments that provide merely an economic exposure to movements in the price of the target company's shares. Similarly, those who act for the bidder will engage in market abuse if they deal for their own benefit in qualifying investments or relevant products in respect of which information concerning the proposed bid is relevant information. (See MAR 1.8.3 G, MAR 1.8.7 G (2) and MAR 1.8.8 G.)

01/12/2001

(E) UNDERWRITING AGREEMENTS

MAR 1.4.31

Agreeing to underwrite an issue of securities will not of itself amount to a misuse of information.

19/07/2001

MAR 1.5

False or misleading impressions

01/12/2004

INTRODUCTION

MAR 1.5.1

Statements in this section to the effect that behaviour amounts to market abuse assume that the test in MAR 1.1.3 G (1) has also been met.

01/12/2001

MAR 1.5.2

Section 118(2)(b) of the Act defines behaviour giving rise to a false or misleading impression as follows:"behaviour [which] is 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 or value of, investments of the kind in question".

01/12/2001

MAR 1.5.3

Prescribed markets provide a mechanism by which the price or value of investments may be determined according to the market forces of supply and demand. When market users trade on prescribed markets they expect the price or value of investments and volumes of trading to reflect the proper operation of market forces rather than the outcome of improper conduct by other market users. Improper conduct which gives market users a false or misleading impression results in market users no longer being able to rely on the prices formed in markets or volumes of trading as a basis for their investment decisions. This will undermine confidence in the integrity of the prescribed market and overall market activity may decrease and transaction costs may rise, or both, to the detriment of market users, including investors.

01/12/2001

ELEMENTS OF THE TEST

MAR 1.5.4

In order to fall within the false or misleading impressions test:

(1) the behaviour must be likely to give the regular user a false or misleading impression. Behaviour will amount to market abuse if the behaviour engaged in is likely to give rise to, or to give an impression of, a price or value or volume of trading which is materially false or misleading; and
(2) in order to be likely, there must be a real and not fanciful likelihood that the behaviour will have such an effect, although the effect need not be more likely than not. The behaviour may, or may be likely to, give rise to more than one effect, including the effect in question.

01/12/2001

GENERAL FACTORS

MAR 1.5.5

Factors that are to be taken into account in determining whether or not behaviour is likely to give the regular user a false or misleading impression as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product include:

(1) the experience and knowledge of the users of the market in question;
(2) the structure of the market, including its reporting, notification and transparency requirements;
(3) the legal and regulatory requirements of the market concerned and accepted market practices;
(4) the identity and position of the person responsible for the behaviour which has been observed (if known); and
(5) the extent and nature of the visibility or disclosure of the person's activity.

01/12/2001

RELATIONSHIP WITH DISTORTION

MAR 1.5.6

In some circumstances, behaviour which falls within these descriptions (see MAR 1.5.7 E) may also fall within the descriptions of behaviour giving rise to a market distortion (see MAR 1.6).

01/12/2001

BEHAVIOUR WHICH AMOUNTS TO MARKET ABUSE

MAR 1.5.7

MAR 1.5.8 E, MAR 1.5.15 E, MAR 1.5.18 E and MAR 1.5.21 E each set out descriptions of behaviour that amount to market abuse in that the behaviour gives rise, or is likely to give rise, to a false or misleading impression.

01/12/2001

(A) ARTIFICIAL TRANSACTIONS

MAR 1.5.8

Behaviour will constitute market abuse where:

(1) a person enters into a transaction or series of transactions in a qualifying investment or relevant product; and
(2) the principal effect of the transaction or transactions will be, or will be likely to be, to inflate, maintain or depress the apparent supply of, or the apparent demand for, or the apparent price or value of a qualifying investment or relevant product so that a false or misleading impression is likely to be given to the regular user; and
(3) the person knows, or could reasonably be expected to know, that the principal effect of the transaction or transactions on the market will be, or will be likely to be, as set out at MAR 1.5.8 E (2);
unless the regular user would regard:
(4) the principal rationale for the transaction in question as a legitimate commercial rationale; and
(5) the way in which the transaction is to be executed as proper.

01/12/2001

MAR 1.5.9

A transaction which creates a false or misleading impression will not normally be considered to have a legitimate commercial rationale where the purpose behind the transaction was to induce others to trade in, or to position or move the price of, a qualifying investment or relevant product. This need not be the sole purpose for entering into the transaction or transactions, but must be an actuating purpose. Equally, transactions will not automatically be considered to have a legitimate commercial rationale simply because the purpose behind the transaction was to make a profit or avoid a loss (whether directly or indirectly).

01/12/2001

MAR 1.5.10

A transaction will be executed in a proper way where it is executed in a way which takes into account the need for the market as a whole to operate fairly and efficiently. The way in which a transaction was executed would be unlikely to be regarded as proper by the regular user where a transaction was executed in a particular way with the purpose of creating a false or misleading impression. In most cases the rules of prescribed markets include a requirement that transactions be executed in a proper way (for example, rules on reporting and executing cross-transactions). Transactions would not necessarily be considered to have been executed in an improper way simply because the way in which they were executed did not disclose the firm's intentions or positions to the market.

01/12/2001

MAR 1.5.11

The following factors are to be taken into account when determining whether a person's behaviour amounts to market abuse as described in MAR 1.5.8 E, although the presence of one or more of these factors does not automatically mean the behaviour in question amounts to market abuse:

(1) whether the transaction causes or contributes to an increase (or decrease) in the supply of, or the demand for, or the price or value of a qualifying investment or relevant product and the person has an interest in the level of the supply of, or the demand for, or the price or value of the qualifying investment or relevant product;
(2) whether the transaction involves the placing of buy and sell orders at prices higher or lower than the market price, or the placing of buy and sell orders which increase the volume of trading;
(3) whether the transaction coincides with a time at or around which the supply of, or the demand for, or the price or value of a qualifying investment or relevant product is relevant (whether for the market as a whole or the person in question) to the calculation of reference prices, settlement prices, and valuations (for example, close of trading, end of quarter);
(4) whether those involved in the transaction are connected parties;
(5) whether the transaction causes the market price of the investment in question to increase or decrease, following which the market price immediately returns to its previous level;
(6) whether a person places a bid (or offer) which is higher (or lower) than the previous bid (or offer) only to remove the bid (or offer) from the market before it is executed.

01/12/2001

MAR 1.5.12

A further factor to be taken into account in determining whether the behaviour amounts to market abuse as described in MAR 1.5.8 E is the extent to which the transaction generally either opens a new position, so creating an exposure to market risk, or closes out a position and so removes market risk. This factor, if present, will tend to suggest that the transaction is likely to have a legitimate commercial rationale and the behaviour does not amount to market abuse as described in MAR 1.5.8 E, subject to the way in which the transaction is executed. Examples of transactions which typically have a legitimate commercial rationale are given at MAR 1.5.24 C.

01/12/2001

MAR 1.5.13

A person has an interest in a qualifying investment or relevant product where that person:

(1) may directly (including by holding a short position) or indirectly benefit from alterations in its market price; or
(2) may be rewarded by, or is otherwise in collusion with or connected with, persons who may benefit from alterations in the market price of the qualifying investment.

01/12/2001

MAR 1.5.14

Examples of behaviour which might give rise to a false or misleading impression and in respect of which the principal rationale may not be a legitimate commercial rationale include:

(1) arrangements for the sale or purchase of a qualifying investment or relevant product (other than on repo or on stock lending or borrowing terms) whereby there is no change in beneficial interests or market risk, or the transfer of beneficial interest or market risk is only between persons who are acting in concert or collusion;
(2) a transaction or series of transactions that are designed to conceal the ownership of a qualifying investment or relevant product, so that disclosure requirements are circumvented by the holding of the qualifying investment in the name of a colluding party, such that disclosures are misleading in respect of the true underlying holding of the security. These transactions are often structured so that market risk remains with the seller. This does not include nominee holdings;
(3) a fictitious transaction.

01/12/2001

(B) DISSEMINATING INFORMATION

MAR 1.5.15

Behaviour will constituted market abuse where:

(1) a person disseminates information which is, or if true would be, relevant information;
(2) the person knows, or could reasonably be expected to know, that the information disseminated is false or misleading; and
(3) the person disseminates the information in order to create a false or misleading impression (this need not be the sole purpose for disseminating the information, but must be an actuating purpose).

01/12/2001

MAR 1.5.16

A factor to be taken into account in determining the purpose of the person in question is whether that person has an interest in a qualifying investment or relevant product (see MAR 1.5.13 E) to which the information is relevant. This factor, if present, will tend to suggest that the person had disseminated the information in order to create a false or misleading impression. That said, the absence of any such interest does not conclusively demonstrate that the behaviour does not amount to market abuse.

01/12/2001

EXAMPLES

MAR 1.5.17

The following is an example of disseminating false or misleading information. A person posts information on an Internet bulletin board or chat room which contains false or misleading statements about the takeover of a company whose shares are qualifying investments. The person knows that the information is false or misleading and he has posted the information in order to create a false or misleading impression.

01/12/2001

(C) DISSEMINATION OF INFORMATION THROUGH AN ACCEPTED CHANNEL

MAR 1.5.18

Behaviour will constitute market abuse where:

(1) a person responsible for the submission of the information to an accepted channel for the dissemination of information submits information which is, or if true would be, relevant information which is likely to give the regular user a false or misleading impression as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product; and
(2) the person who submits the information has not taken reasonable care to ensure it is not false or misleading.

01/12/2001

MAR 1.5.19

There are a number of channels through which information relating to qualifying investments which are traded on prescribed markets is formally disseminated to other market users. Some information is required to be disseminated through one of these channels, for example, under the rules of the prescribed market or the Listing Rules. RIEs also use these channels to disseminate information about trades which have been executed on their markets.

01/12/2001

MAR 1.5.20

The FSA recognises the importance of information disseminated through accepted channels for the dissemination of information. Users of such information should be able to rely on the accuracy and integrity of information carried through these channels. It is, therefore, appropriate that those who disseminate information through them, for example, the company itself, its financial advisers or its public relations advisers, take reasonable care to ensure the information is not inaccurate or misleading. Where they do not, and the information is likely to give rise to a false or misleading impression, they will be regarded as engaging in behaviour which amounts to market abuse.

01/12/2001

(D) COURSE OF CONDUCT

MAR 1.5.21

Behaviour will constitute market abuse where:

(1) a person engages in a course of conduct, the principal effect of which will be, or is likely to be, to give a false or misleading impression to the regular user as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product; and
(2) the person knows, or could reasonably be expected to know, that the principal effect of the conduct on the market will be, or is likely to be as set out in MAR 1.5.21 E (1);
unless the regular user would regard:
(3) the principal rationale for the conduct in question as a legitimate commercial rationale (see MAR 1.5.9 E) and
(4) the way in which the conduct is engaged in as proper (see MAR 1.5.10 E)

01/12/2001

EXAMPLES

MAR 1.5.22

The exact nature of conduct that might give a false or misleading impression will vary according to the characteristics of the market. The following are examples of behaviour which might give a false or misleading impression to the regular user:

(1) the movement of physical commodity stocks, which might create a misleading impression as to the supply of, or demand for, or price or value of, a commodity or the deliverable into a commodity futures contract; and
(2) the movement of an empty cargo ship, which might create a false or misleading impression as to the supply of, or the demand for, or the price or value of a commodity or the deliverable into a commodity futures contract.

01/12/2001

SAFE HARBOURS

MAR 1.5.23

MAR 1.5.24C, MAR 1.5.25C, MAR 1.5.27C and MAR 1.5.28C each set out descriptions of behaviour that does not amount to market abuse in that the behaviour does not give rise to a false or misleading impression (see MAR 1.5.4E).

01/12/2001

(A) PERMITTED TRANSACTIONS

MAR 1.5.24

The following examples of behaviour will not give rise to a false or misleading impression even though the conditions described in MAR 1.5.8E(1), MAR 1.5.8E(2) and MAR 1.5.8E(3) are satisfied, provided that the conditions in MAR 1.5.8E(4) and MAR 1.5.8E(5) are also satisfied:

(1) transactions which effect the taking of a position, or the unwinding of a position taken, so as to take legitimate advantage of:

(a) differences in the taxation of income or capital returns generated by investments or commodities (whether such differences arise solely because of the identity of the person entitled to receive such income or capital or otherwise); or
(b) differences in the prices of investments or commodities as traded in different locations; or

(2) transactions which effect the lending or borrowing of qualifying investments or commodities so as to meet an underlying commercial demand for the investment or commodity.

01/12/2001

(B) REQUIRED REPORTING OR DISCLOSURE OF TRANSACTIONS

MAR 1.5.25

Making a report or disclosure will not, of itself, give rise to a false or misleading impression if:

(1) the report or disclosure was made in accordance with the way specified by any applicable legal or regulatory requirement; and
(2) the report or disclosure was expressly required or expressly permitted by the rules or the rules of a prescribed market or the rules of the Takeover Code or SARs or by any other applicable statute or regulation or the rules of any competent statutory, governmental or regulatory authority.

01/12/2001

MAR 1.5.26

Examples of disclosure that is expressly required or expressly permitted include rule 9.10(j) of the listing rules, which permits a company to delay certain announcements at its discretion, and section 198 of the Companies Act 1985 which requires disclosure of certain interests in shares. See also MAR 1.7.7 C concerning rules of the Takeover Code which relate, among other things, to the timing of announcements and MAR 1.7.3 E (3) - MAR 1.7.3 E (4) concerning the listing rules.

01/12/2001

(C) CHINESE WALLS

MAR 1.5.27

Where a person is an organisation, that person may be aware of information that is not known to all of the individuals within the organisation. If an individual within the organisation disseminates information which he would know, or could reasonably be expected to know, is false or misleading if he was aware of information held by other individuals within the organisation, then that person will be taken not to know, or to be reasonably expected to know, that the information disseminated was false or misleading if:

(1) the other information in question is held behind an effective Chinese wall or is restricted using other similarly effective arrangements; and
(2) there was nothing which was known, or ought reasonably to have been known, to the individual who disseminated the information which should have led him to conclude it was false or misleading.

01/12/2001

MAR 1.5.28

For the purposes of MAR 1.5.27 C, the fact that the person did not know, or could not be reasonably expected to know, that the information was false or misleading can be demonstrated by showing that the requirements identified in MAR 1.4.22 E have been satisfied. Where it can be demonstrated that the individual disseminating the information did not know, or could not be reasonably expected to know, that the information was false or misleading, behaviour will not fall within the description of market abuse set out in MAR 1.5.15 E.

01/12/2001

MAR 1.5.29

The circumstances described in MAR 1.4.23 E (1) to MAR 1.4.23 E (3) are capable of giving rise to a presumption that the other information in question is held behind an effective Chinese wall or is restricted using other similarly effective arrangements.

01/12/2001

MAR 1.6

Distortion

01/12/2004

INTRODUCTION

MAR 1.6.1

Statements in this section to the effect that behaviour 'amounts to market abuse' assume that the test in MAR 1.1.3 G (1) has also been met.

01/12/2001

MAR 1.6.2

Section 118(2)(c) of the Act defines behaviour amounting to distortion as follows:'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'.

01/12/2001

MAR 1.6.3

The matters in MAR 1.5.3 G apply with equal force in connection with behaviour which gives rise to market distortion. A person may not engage in behaviour that interferes with the proper operation of market forces and so with the interplay of proper supply and demand and so has a distorting effect. Distortion undermines confidence in the prescribed markets and damages efficiency to the detriment of market users, including investors.

01/12/2001

ELEMENTS OF THE TEST

MAR 1.6.4

In order to fall within the distortion test:

(1) the behaviour must be such that a regular user would, or would be likely to, regard it as behaviour which would, or would be likely to, distort the market in the investment in question. Behaviour will amount to market abuse if the behaviour engaged in interferes with the proper operation of market forces with the purpose of positioning prices at a distorted level. This need not be the sole purpose of entering into the transaction or transactions, but must be an actuating purpose; and
(2) in order to be likely, there must be a real and not fanciful likelihood that the behaviour will have such an effect, although the effect need not be more likely than not. The behaviour may, or may be likely to, give rise to more than one effect, including the effect in question.

01/12/2001

MAR 1.6.5

It is unlikely that the behaviour of market users when trading at times and in sizes most beneficial to them (whether for the purpose of long term investment objectives, risk management or short term speculation) and seeking the maximum profit from their dealings will of itself amount to distortion. Such behaviour, generally speaking, improves the liquidity and efficiency of markets.

01/12/2001

MAR 1.6.6

It is unlikely that prices in the market which are trading outside their normal range will necessarily be indicative that someone has engaged in behaviour with the purpose of positioning prices at a distorted level. High or low prices relative to a trading range can be the result of the proper interplay of supply and demand.

01/12/2001

RELATIONSHIP WITH FALSE OR MISLEADING IMPRESSIONS

MAR 1.6.7

In some circumstances, behaviour which falls within these descriptions (see MAR 1.6.8 G) may also fall within the scope of the prohibition against behaviour giving rise to a false or misleading impression (see MAR 1.5).

01/12/2001

BEHAVIOUR WHICH AMOUNTS TO MARKET ABUSE

MAR 1.6.8

MAR 1.6.9 E and MAR 1.6.13 G each set out descriptions of behaviour that amount to market abuse in that the behaviour gives rise to market distortion.

01/12/2001

(A) PRICE POSITIONING

MAR 1.6.9

Behaviour will constitute market abuse where a person enters into a transaction, or a series of transactions, with the purpose of positioning the price of a qualifying investment or relevant product at a distorted level (the purpose need not be the sole purpose for entering into the transaction or transactions, but must be an actuating purpose).

01/12/2001

MAR 1.6.10

It follows that behaviour which incorporates a purpose of positioning the price at a distorted level cannot have a legitimate commercial rationale. The Code does not restrict market users trading significant volumes where there is a legitimate purpose for the transaction (for example, index tracking which can involve trading significant volumes on the close) and where the transaction is executed in a proper way, that is, a way which takes into account the need for the market as a whole to operate fairly and efficiently. In most cases the rules of prescribed markets include a requirement that transactions be executed in a proper way (for example, rules on reporting and executing cross-trades). Such behaviour is unlikely to distort the market in the investments in question, even if it causes the market to move. But trading significant volumes with the purpose of controlling the price of a qualifying investment or a relevant product and positioning it at a distorted level will amount to market abuse.

01/12/2001

MAR 1.6.11

The following factors will be taken into account when determining whether a person has positioned the price of a qualifying investment or relevant product at a distorted level, although the presence of one or more of these factors does not automatically mean the market has been distorted:

(1) the extent to which the timing of the person's transaction or transactions coincided with a time at or around which the price of the qualifying investment or relevant product was relevant (whether for the market as a whole and or the person in question) to the calculation of reference prices, settlement prices, and valuations (for example, close of trading, end of quarter);
(2) the extent to which the person had a direct or indirect interest in the price or value of the qualifying investment or relevant product;
(3) the volume or size of the person's transaction or transactions in relation to reasonable expectations of the depth and liquidity of the market at the time in question;
(4) the extent to which price, rate or option volatility movements, and the volatility of these factors for the investment in question occur which are outside their normal intra-day, daily, weekly or monthly range;
(5) the extent to which the person's transaction or transactions caused the market price of the investment to increase or decrease, following which the market price returned immediately to its previous level; and
(6) whether a person has successively and consistently increased or decreased his bid, offer or the price he has paid for a qualifying investment or relevant product.

01/12/2001

EXAMPLES

MAR 1.6.12

The following are examples of price positioning at a distorted level:

(1) a trader simultaneously buys and sells the same investment (that is, trades with himself) to give the appearance of a legitimate transfer of title or risk (or both) at a price outside the normal trading range for the investment. The price of the investment is relevant to the calculation of the settlement value of an option. He does this while holding a position in the option. His purpose is to position the price of the investment at a distorted level, making him a profit or avoiding a loss;
(2) a trader buys a large volume of commodity futures (whose price will be relevant to the calculation of the settlement value of a derivatives position he holds) just before the close of trading. His purpose is to position the price of the commodity futures at a distorted level so as to make a profit from his derivatives position;
(3) a trader holds a short position that will show a profit if a particular investment, which is currently a component of an index, falls out of that index. The question of whether the investment will fall out of the index depends on the closing price of the investment. He places a large sell order in this investment just before the close of trading. His purpose is to position the price of the investment at a distorted level so that the investment will drop out of the index so as to make a profit; and
(4) a fund manager's quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher rather than lower. He places a large order to buy relatively illiquid shares, which are also components of his portfolio, to be executed at or just before the close. His purpose is to position the price of the shares at a distorted level.

01/12/2001

(B) ABUSIVE SQUEEZES

MAR 1.6.13

Behaviour will constitute market abuse where a person engages in an abusive squeeze. That is, where a person with:

(1) a significant influence over the supply of, or demand for, or delivery mechanisms for a qualifying investment or relevant product; and
(2) a position (directly or indirectly) in an investment under which quantities of the qualifying investment or relevant product in question are deliverable;

engages in behaviour with the purpose of positioning at a distorted level the price at which others have to deliver, take delivery or defer delivery to satisfy their obligations (the purpose need not be the sole purpose of entering into the transaction or transactions, but must be an actuating purpose).

01/12/2001

MAR 1.6.14

Squeezes occur relatively frequently when the proper interaction of supply and demand leads to market tightness, but this is not of itself abusive. In addition, having a significant influence over the supply of, or demand for, or delivery mechanisms for an investment, for example, through ownership, borrowing or reserving the investment in question, is not of itself abusive.

01/12/2001

MAR 1.6.15

An abusive squeeze occurs where a person has satisfied the conditions in MAR 1.6.13 G, which include positioning the price at a level materially different than the price that would have been determined by the interaction of proper supply and demand at which others have to deliver, take delivery or defer delivery to satisfy their obligations. Abusive squeezes damage liquidity and confidence in prescribed markets on a multilateral, not just a bilateral, basis and damage confidence in the delivery mechanisms of prescribed markets.

01/12/2001

MAR 1.6.16

The following factors will be taken into account when determining whether a person has engaged in an abusive squeeze. These factors do not impose new obligations on market users. For example, they do not impose an obligation to lend to others where one does not already exist, although behaviour is less likely to amount to an abusive squeeze if a person is willing to lend the investment in question. The factors are as follows:

(1) the extent to which a person is willing to relax his control or other influence in order to help maintain an orderly market, and the price at which he is willing to do so;
(2) the extent to which the person's activity causes, or risks causing, settlement default by other market users on a multilateral basis and not just a bilateral basis. The more widespread the risk of multilateral settlement default, the more likely that the market has been distorted;
(3) the extent to which prices under the delivery mechanisms of the market diverge from the prices for delivery of the investment or its equivalent outside those mechanisms. The greater the divergence beyond that to be reasonably expected, the more likely that the market has been distorted; and
(4) the extent to which the spot or immediate market compared to the forward market is unusually expensive or inexpensive or the extent to which borrowing rates are unusually expensive or inexpensive.

01/12/2001

MAR 1.6.17

The effects of an abusive squeeze are likely to be influenced by the extent to which other market users have failed to protect their own interests or fulfil their obligations in a manner consistent with the standards of behaviour to be expected of them in that market. The regular user is likely to expect other market users to settle their obligations and not to put themselves in a position where, to do so, they have to rely on holders of long positions lending when they may not be inclined to do so and may be under no obligation to do so.

19/07/2001

EXAMPLES

MAR 1.6.18

The following is an example of an abusive squeeze. A trader with a long position in bond futures buys or borrows a large amount of the cheapest to deliver bonds and either refuses to re-lend these bonds or will only lend them to parties he believes will not re-lend to the market. His purpose is to position the price at which those with short positions have to deliver to satisfy their obligations at a materially higher level, making him a profit.

01/12/2001

(C) SAFE HARBOURS

MAR 1.6.19

Behaviour which complies with the London Metal Exchange's document "Market Aberrations: The Way Forward" published in October 1998, which governs the behaviour expected of long position holders, will not amount to market abuse in that the behaviour will not amount to distortion (see MAR 1.6.4 E).

01/12/2001

MAR 1.7

Statutory Exceptions

01/12/2004

MAR 1.7.1

The Act provides statutory exceptions for two types of behaviour in relation to the market abuse regime. The first relates to behaviour which is described in this Code as not amounting to market abuse (see MAR 1.1.10 G). The second relates to behaviour which conforms with an FSA rule where that rule includes a provision to the effect that behaviour conforming with that rule does not amount to market abuse (section 118(8) of the Act). In the Code, specific instances of both these exceptions are referred to as 'safe harbours'. In addition, the Act states that information which can be obtained by research or analysis is to be regarded as generally available (section 118(7) of the Act) (see MAR 1.4.5 E).

01/12/2001

MAR 1.7.2

Behaviour will be regarded as conforming with an FSA rule only if it is required or expressly permitted by that rule. In order to fall within this safe harbour, there must be a specific rule that either requires or expressly permits a person to engage in the behaviour in question.

01/12/2001

FSA RULES

MAR 1.7.3

The FSA rules which contain a provision to the effect that behaviour conforming with that rule does not amount to market abuse (section 118(8) of the Act) are:

(1) the price stabilising rules; (MAR 2; see MAR 2.1.1 R(2));
(2) a rule relating to Chinese walls (COB 2.4.4 R (1)); see COB 2.4.4 R (4) and see also MAR 1.4.21 C and MAR 1.5.27 C;
(3) those parts of the listing rules which relate to the timing, dissemination or availability, content and standard of care applicable to a disclosure, announcement, communication or release of information. These are specified in MAR 1 Annex 1;
(4) rule 15.1(b) of the listing rules (in relation to share buy-backs).

01/12/2001

TAKEOVER CODE AND SARs

MAR 1.7.4

The FSA exercises in MAR 1.7.7 C - MAR 1.7.8 C, with the approval of the Treasury, the powers conferred by section 120 of the Act (Provisions included in the Authority's code by reference to the City Code), save that any reference made to the SARs is made under section 119 of the Act and therefore does not require the approval of the Treasury.

01/12/2001

MAR 1.7.5

These safe harbours apply in relation to behaviour likely to give rise to a false or misleading impression as described in MAR 1.5, and behaviour which would, or would be likely to, give rise to distortion as described in MAR 1.6, but not in relation to behaviour based on the misuse of information as described in MAR 1.4.

01/12/2001

MAR 1.7.6

The FSA is satisfied that the remainder of the Takeover Code and SARs do not permit or require behaviour which amounts to market abuse. Much of the Takeover Code and the SARs is not directed specifically at the types of behaviour prohibited by the Act; for example, many provisions are directed at ensuring that an offer or stakebuilding is conducted within an orderly framework or that shareholders in a company are treated similarly. Other provisions, such as the rules dealing with the specific content of offeree and offeror documents, are encompassed within the general content standard in Rule 23 of the Takeover Code and have not, therefore, been given a specific safe harbour.

01/12/2001

MAR 1.7.7

Behaviour conforming with any of the rules of the Takeover Code or SARs in relation to the timing, dissemination or availability, content and standard of care applicable to a disclosure, announcement, communication or release of information, and which rules are specified in MAR 1 Annex 2, does not of itself amount to market abuse in that the behaviour does not give rise to a false or misleading impression (MAR 1.5.4 E) or distortion (MAR 1.6.4 E) in so far as the behaviour is expressly required or expressly permitted by the rule in question, but this is subject to MAR 1.7.10 E.

01/12/2001

MAR 1.7.8

Behaviour conforming with Rule 4.2 of the Takeover Code (in relation to restrictions on dealings by offeror and concert parties) does not of itself amount to market abuse in that the behaviour does not give rise to a false or misleading impression (MAR 1.5.4 E) or distortion (MAR 1.6.4 E) in so far as the behaviour is expressly required or expressly permitted by that rule, but this is subject to MAR 1.7.10 E.

01/12/2001

MAR 1.7.9

An example of how MAR 1.7.7 C is intended to work may assist. If the rule in question in the Takeover Code is about timing of an announcement, then the protection of MAR 1.7.7 C is conferred on the behaviour in so far as timing is relevant. However, the method of dissemination, the content and the standard of care will not be protected unless they are respectively in compliance with relevant provisions of the Takeover Code or SARs relating to dissemination, content and standard of care.

01/12/2001

MAR 1.7.10

MAR 1.7.7 C and MAR 1.7.8 C do not apply in any case where the behaviour which conforms with the particular rule of the Takeover Code is nonetheless in breach of any General Principle set out at Section B of the Takeover Code which is relevant to that rule.

01/12/2001

MAR 1.7.11

In applying MAR 1.7.7 C, the notes for the time being associated with the rules identified in the Takeover Code are treated as part of the relevant rule.

01/12/2001

MAR 1.7.12

Certain provisions of the Takeover Code and of the SARs restrict the commercial freedom of a person by, for example, restricting the speed at which shares can be acquired. However, behaviour in compliance with such provisions will not be regarded as giving a false or misleading impression, as such restrictions will be taken into account in assessing whether behaviour falls below the standard reasonably to be expected.

01/12/2001

MAR 1.7.13

In cases where none of the safe harbours in MAR 1.7.7 C to MAR 1.7.8 C apply, the regular user may not necessarily consider that complying with applicable requirements of the Takeover Code or the SARs will be sufficient in and of itself to demonstrate that behaviour does not amount to market abuse. An example may help to explain this. If, for example, a person were to comply with Rule 1 of the SARs in building a stake, but his decision to build the stake was based on relevant information and none of the safe harbours in MAR 1.4 applied, that person's behaviour would be likely to amount to market abuse. Nevertheless, the question whether a person has complied with relevant provisions of the Takeover Code and SARs which do not give a safe harbour may be relevant to a regular user's assessment of whether or not that person's behaviour has fallen below reasonably expected standards.

01/12/2001

MAR 1.8

Requiring or encouraging

01/12/2004

MAR 1.8.1

Section 123(1)(b) of the Act (Power to impose penalties) gives the FSA the power to impose a penalty on a person, "A", if it is satisfied that A, "by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, if engaged in by A, would amount to market abuse".

01/12/2001

MAR 1.8.2

For the purposes of section 123(1)(b), it must be shown:

(1) that the behaviour would have amounted to market abuse if carried out by the person who requires or encourages (to which hypothetical situation the principles set out in this Code will be applied); and
(2) that the person, by action or inaction, required or encouraged another to engage in the behaviour in question.

It is not necessary to show that the person who requires or encourages has benefited from the action of the person who is required or encouraged. (See MAR 1 Annex 4 (Frequently asked questions))

01/08/2002

MAR 1.8.3

There are many ways in which a person, A, may, by taking or refraining from taking any action, require or encourage another person, B, to engage in behaviour which, if engaged in by A, would amount to market abuse. Some examples of behaviour that might fall within the scope of 123(1)(b) are as follows:

(1) where a director of a company, while in possession of information which is both relevant information and disclosable information (other than trading information) and which is not generally available to market users, instructs an employee of that company to deal in qualifying investments or relevant products in respect of which the information is relevant and disclosable information;
(2) where A recommends or advises B to engage in behaviour which, if engaged in by A, would amount to market abuse.

01/12/2001

MAR 1.8.4

Whether a person's taking or refraining from taking action might be regarded as requiring or encouraging others will depend on circumstances such as acceptable market practices, the experience, level of skill and standard of knowledge of the person concerned, and the control or influence the person has in relation to the person who engages in the behaviour in question.

01/12/2001

MAR 1.8.5

However, early or selective disclosure of information which a regular user would expect market users to have will generally be presumed to constitute requiring or encouraging unless there is a legitimate purpose for making the disclosure, for example, as permitted or required by the rules of a prescribed market, the rules of the FSA, or the rules of the Takeover Code. Any such disclosure should be accompanied by a statement at or before the time the information is passed that the information is given in confidence and that the recipient should not base any behaviour in relation to the qualifying investment or relevant product which would amount to marketabuse on the information until after the information is made generally available. Such a statement may be incorporated in the express or implied terms of any contract governing the relationship between the persons making and receiving the disclosure. Some examples of disclosure for a legitimate purpose are set out in MAR 1.8.6 G.

01/12/2001

MAR 1.8.6

The FSA will not regard a person as requiring or encouraging others to deal if he passes information which is relevant information and not generally available to:

(1) his employees (or, where appropriate, his fellow employees or employees of a group or associated company) for the purpose of enabling them to perform their functions in circumstances where the possession of the information in question is necessary for the proper performance of those functions; or
(2) his professional advisers, and or the professional advisers of any persons involved or who may be involved in any transaction or takeover bid with or involving him, for the purpose of obtaining advice; or
(3) any person with whom he is negotiating, or intends to negotiate, any commercial, financial or investment transaction (including prospective underwriters or placees of securities) for the purpose of facilitating the proposed transaction; or
(4) any person from whom he is seeking or intends to seek an irrevocable commitment or expression of support in relation to an offer which is subject to the Takeover Code, for the purpose of obtaining that commitment or expression of support; or
(5) representatives of his employees or trade unions acting on their behalf in fulfilment of a legal obligation; or
(6) any government department, the Bank of England, the Competition Commission, the Takeover Panel or any other statutory or regulatory body or authority for the purposes of fulfilling a legal or regulatory obligation or otherwise in connection with the performance of the functions of the body to which the information has been passed.

01/12/2001

MAR 1.8.7

In the context of a takeover bid (see MAR 1.4.28 C - MAR 1.4.30 E), a person, A, will not be regarded as having required or encouraged another person, B, to engage in behaviour amounting to market abuse in circumstances where:

(1) A is an adviser to B, and B is considering the acquisition or disposal of an equity stake; and
(2) A advises B to acquire or dispose of an equity stake in the target company for the purposes and in the manner specified in MAR 1.4.28 C.

19/07/2001

MAR 1.8.8

Where the originator of the transaction appears to have engaged in market abuse and, in the course of doing so, has acted through an intermediary, the intermediary's behaviour will not amount to either requiring or encouraging or market abuse unless the intermediary knew or ought reasonably to have known that the originator was engaging in market abuse. (See MAR 1 Annex 4 (Frequently asked questions))

01/08/2002

MAR 1.8.9

There are circumstances where the FSA will regard a person as requiring or encouraging: for example, where a person who has relevant and disclosable information about a company which is not yet generally available to other market users, advises or encourages another to acquire shares in that company, unless guidance suggests that this is acceptable (see for example, MAR 1.8.7 G).

01/12/2001

MAR 1.8.10

A director of a company or relevant employee (as defined in the Model Code) will not be regarded as having required or encouraged another person to engage in behaviour amounting to market abuse where the director or relevant employee acts in compliance with provisions of the company's code of dealing implemented in accordance with paragraph 16.18 of the listing rules equivalent to the requirements in paragraphs 11 and 12 (Dealings by connected parties and investment managers) of the Model Code.

01/12/2001

MAR 1.9

Relationship with criminal law and other regulatory requirements

01/12/2004

MAR 1.9.1

Nothing in the Code makes lawful or permits any activity that contravenes the criminal law or applicable legal or regulatory requirements. In particular, nothing in this Code modifies or affects any other obligations of persons who are bound by the rules, the rules of a prescribed market or other relevant rules, regulations or codes of conduct or good practice. The FSA's policy on individual guidance in Chapter 9 of the Supervision manual (SUP 9) is relevant to a person seeking guidance on the Code.

01/12/2001

MAR 1.9.2

Persons will, therefore, need to ensure that, even if their behaviour does not amount to market abuse, it does not breach:

(1) any applicable criminal law, for example the insider dealing provisions of the Criminal Justice Act 1993 or the provisions relating to misleading statements and practices in section 397 of the Act; or
(2) any applicable rules, for example Principle 5 of the Principles for Businesses (PRIN), the Conduct of Business sourcebook (COB), and the Statements of Principle and Code of Practice for Approved Persons (APER); or
(3) any other legal or regulatory requirements to which they are subject, including the rules and regulations of RIEs, the provisions of the Takeover Code and the SARs, the Companies Acts, overseas rules and regulatory requirements.

01/12/2001

MAR 1.9.3

Principle 5 requires a firm to observe proper standards of market conduct. APER 4.3.1 G requires approved persons to observe proper standards of market conduct in carrying out their controlled function. There is, therefore, some degree of overlap between Principle 5 and the market abuse regime,and between APER 4.3.1 G and the market abuse regime. However, there are some important differences:

(1) Principle 5 and APER 4.3.1 G apply only to authorised persons and to approved persons, respectively, whereas the market abuse regime applies to all persons.
(2) the market abuse regime applies only to behaviour which occurs in relation to qualifying investments traded on a prescribed market. Principle 5 applies, in respect of authorised persons, in relation to activities wherever conducted, if the activities have or might have a negative effect on confidence in the financial system, and otherwise broadly in relation to activities carried on in the United Kingdom. APER 4.3.1 G applies to the activities of approved persons in carrying out their controlled function wherever they occur.
(3) Principle 5 and APER 4.3.1 G are broader in scope than the market abuse regime. Principle 5 and APER 4.3.1 G are directed generally at all behaviour which may fall short of proper standards of market conduct. Accordingly, behaviour may fall short of proper standards of market conduct, and therefore breach Principle 5 and APER 4.3.1 G, even though such behaviour does not constitute market abuse.

01/12/2001

MAR 1.10

Statement of policy on penalties

01/12/2004

MAR 1.10.1

Section 124 of the Act requires the FSA to publish a statement of its policy with respect to the imposition and amount of penalties in cases of market abuse under section 123 of the Act. This statement must include an indication of the circumstances in which the FSA is to be expected to regard a person as having a reasonable belief that his behaviour did not amount to market abuse or having taken reasonable precautions and exercised due diligence to avoid engaging in market abuse. This statement is contained in ENF 14.

01/12/2001

MAR 1.11

The scope of the market abuse regime

01/12/2004

PRESCRIBED MARKETS AND QUALIFYING INVESTMENTS

MAR 1.11.1

Section 118(1) of the Act defines market abuse as behaviour which amongst other things: "occurs in relation to qualifying investments traded on a market to which this section applies"(See MAR 1 Annex 4 (Frequently asked questions))

01/12/2001

MAR 1.11.2

Section 118(3) allows the Treasury to prescribe markets and qualifying investments. This is the purpose of the Prescribed Markets and Qualifying Investments Order. This Order, when read in conjunction with the Act, makes certain kinds of investment "traded on" prescribed markets qualifying investments. The Treasury has prescribed all markets established under the rules of a UK RIE and the market known as OFEX as markets to which section 118 applies. The prescribed markets, as at 30 June 2003, are:

(1) the markets established under the rules of the following (the UK RIEs):

(a) EDX London Ltd;
(b) The International Petroleum Exchange of London Limited;
(c) LIFFE Administration and Management;
(d) The London Metal Exchange Limited;
(e) London Stock Exchange plc (including AIM);
(f) OM London Exchange Limited;
(g) virt-x Exchange Limited;

(2) The market known as OFEX.

01/12/2001

MAR 1.11.3

In the majority of cases, there will be no dispute that an investment is "traded on" a prescribed market. However, in a small number of cases, for example, where an investment has traded in the past but not recently, and where an investment has not yet started trading, the answer may be less obvious. To avoid any doubt, the following investments would be "traded on" a prescribed market:

(1) investments which have not yet traded subject to the rules of a prescribed market from the point they start trading subject to the rules of a prescribed market (including the first trade);
(2) investments which are currently trading subject to the rules of a prescribed market; and
(3) investments which have traded in the past and can still be traded subject to the rules of a prescribed market.

01/12/2001

MAR 1.11.4

The fact that behaviour has occurred in relation to an investment "traded on" a prescribed market is a necessary condition for market abuse to have occurred but it is not a sufficient condition. In addition, the behaviour must, among other things, satisfy one or more of the three conditions identified in section 118(2). It is difficult to see how these tests could be satisfied where there is no ongoing market on the prescribed market in the qualifying investment. If there is no ongoing market for a qualifying investment on a prescribed market, market participants are unlikely to rely on the prescribed market for price discovery or price formation. Equally, any trading in such a qualifying investment that is not associated with the prescribed market is unlikely to damage confidence in the prescribed market. The question of whether there is an ongoing market will depend on a number of factors, including how recently and in what volumes the qualifying investment has traded. The importance of these factors is likely to vary from market to market.

01/12/2001

MAR 1.11.5

An example shows how this guidance might be applied. An investment has not traded for a long time or only in insignificant volumes but it can still be traded subject to the rules of a prescribed market. The investment will be "traded on" a prescribed market for the purposes of the regime (MAR 1.11.3 G). There will probably be no ongoing market in this investment since it has not traded for a long time or only in insignificant volumes. For that reason, behaviour in this investment is unlikely to amount to market abuse (MAR 1.11.4 G).

01/12/2001

BEHAVIOUR OCCURRING IN RELATION TO QUALIFYINGINVESTMENTS

MAR 1.11.6

Section 118(1)(a) of the Act requires that, in order to amount to market abuse, behaviour must occur in relation to qualifying investments traded on a market to which the section applies. According to section 118(6) of the Act:"the behaviour which is to be regarded as occurring in relation to qualifying investments includes behaviour which:

(1) occurs in relation to anything which is the subject matter, or whose price or value is expressed by reference to the price or value, of those qualifying investments; or
(2) occurs in relation to investments (whether qualifying or not) whose subject matter is those qualifying investments."

01/12/2001

MAR 1.11.7

The definition of behaviour in relation to a qualifying investment in section 118(6) is not exhaustive. However, there must be a clear relationship between the behaviour and a qualifying investment for the behaviour to be regarded as occurring in relation to a qualifying investment. Further, where behaviour is engaged in for the purpose of abuse in relation to a qualifying investment, it may be regarded as having occurred in relation to a qualifying investment even though the behaviour is not in a qualifying investment or relevant product (see MAR 1.11.8 E).

01/12/2001

MAR 1.11.8

The statutory definition of behaviour which occurs in relation to qualifying investments set out at MAR 1.11.6 E includes behaviour in relation to other investments which are not themselves qualifying investments, since such behaviour can have a damaging effect on confidence in prescribed markets and qualifying investments. These related investments are referred to in this Code as relevant products.

01/12/2001

MAR 1.11.9

Behaviour in the following relevant products is caught by section 118(6) of the Act:

(1) anything that is the subject matter of a qualifying investment;
(2) anything whose price is expressed by reference to the price of a qualifying investment;
(3) anything whose price is expressed by reference to the value of a qualifying investment;
(4) anything whose value is expressed by reference to the price of a qualifying investment;
(5) anything whose value is expressed by reference to the value of a qualifying investment;
(6) investments (whether qualifying or not) whose subject matter is a qualifying investment.

01/12/2001

MAR 1.11.10

Something will be the subject matter of an investment or a qualifying investment where there is a clear (for example, contractual, documented) relationship between the two: for example, the subject matter specified in the contract specification of an exchange-traded investment. Contract specifications for exchange-traded investments which are physically settled will specify the deliverable product under the contract. Contract specifications for exchange-traded instruments which are cash-settled will specify the subject matter of the contract by reference to which the settlement price is to be calculated. In relation to OTC investments, the subject matter of the investment will be specified in the accompanying contractual documentation. The following are examples of the application of the element of subject matter:

(1) the subject matter of the gilt futures contract traded on LIFFE (which is a qualifying investment) is those gilts which are deliverable under the terms of the contract (which are investments). The gilts are therefore relevant products;
(2) the subject matter of the FTSE Eurotop 100 index option traded on LIFFE (which is a qualifying investment) is all the individual shares which constitute the index (which are investments). The shares are all therefore relevant products;
(3) the subject matter of an OTC option on a basket of UK shares (which is an investment) traded on a prescribed market is qualifying investments and the OTC option is therefore a relevant product.

01/12/2001

MAR 1.11.11

The following are examples of the price and or value relationship between a qualifying investment and a relevant product:

(1) the value of a spread bet in relation to a basket of UK shares traded on a prescribed market is expressed by reference to the price of the shares (which are qualifying investments) and the spread bet is therefore a relevant product;
(2) the price of an OTC contract in relation to Brent crude is expressed by reference to the price of the Brent crude futures contract traded on the IPE (which is a qualifying investment) and the OTC contract is therefore a relevant product;
(3) the value of a total return swap in relation to a UK share traded on a prescribed market is expressed by reference to the value (that is the price and any dividend) of the share (which is a qualifying investment) and the total return swap is therefore a relevant product.

01/12/2001

MAR 1 Annex 1

Provisions of the Buy-back and Stabilisation Regulation relating to buy-back programmes

01/12/2004

MAR 1 Annex 1.1

Disclosure of information which is not generally available

8.3
9.4, 9.5, 9.15
17.25, 17.26, 17.67

Standards of care

9.3A
17.24A
23.22A and 23.58A

Timing of announcements, documentation and dealings

9.4, 9.10(j), 9.11, 9.12,
9.14, 9.35
12.40, 12.48
15.9, 15.15
16.14
17.25, 17.33, 17.54
23.22(g), 23.61

Content of announcements

9.1, 9.2
14.1(a) and (b)
17.22, 17.23
23.22(a), 23.58

01/12/2004

MAR 1 Annex 2

Accepted Market Practices

01/12/2004

Takeover Code

Disclosure of information which is not generally available

1(a)
2.1 plus notes, 2.5, 2.6, 2.9 plus notes
8
19.7
20.1, 20.2, 20.3
28.4
37.3(b) and 37.4(a)

Standards of care

2.8
19.1, 19.5 second sentence and note 2, 19.8
23 plus notes
28.1

Timing of announcements, documentation and dealings

2.2
5.4
6.2(b)
7.1
11.1 note 6 only
17.1
21.2
30
31.6(c), 31.9
33 (only in so far as it refers 31.6(c) and 31.9 only)
38.5

Content of announcements

2.4
19.3

SARs

Timing of disclosure

3
4.1(a) and (e), 4.3, 4.4

01/12/2001

MAR 1 Annex 3

Specialist topics

01/12/2004

Scope of the market abuse regime

Scope of the market abuse regime for bonds

If a qualifying investment ("QI"), for example a security , trades on a prescribed market, it falls within the scope of the regime (see MAR 1.11.1 G). Any other behaviour "in relation to qualifying investments" traded on a prescribed market also falls within the scope of the market abuse regime (see MAR 1.11.1 G). For example, bonds "traded on", or traded subject to the rules of, CoredealMTS or the London Stock Exchange (see MAR 1.11.3 G (2)) are QIs traded on a prescribed market. Eurobonds which have at no time traded on an RIE do not fall within the scope of the regime.

Bonds admitted to trading on a prescribed market but traded subject to the rules of a non-prescribed market may fall within the scope of the regime if they have previously traded on the prescribed market . However, if there is no ongoing market for a QI on a prescribed market , market participants are unlikely to rely on the prescribed market for price discovery. Equally, if there is no continuing market for the QI on the prescribed market, behaviour is unlikely to damage confidence in the prescribed market for that QI (MAR 1.11.4 G).

The scope of the regime for 'grey market' or 'when issued' trading (equities and bonds)

'Grey market' or 'when issued' trading in a qualifying investment on a prescribed market will usually be within the scope of the regime. Where a prescribed market has rules for 'when issued' trading in a security or derivative of that security , and trading in that security or derivative is subject to the rules of the prescribed market, it will also fall within the scope of the regime. This trading will fall within the "traded on" concept as this includes traded subject to the rules of a prescribed market (MAR 1.11.3 G (2)). This will include 'when issued' trading on the London Stock Exchange in shares and on LIFFE in equity options. Where there is 'grey market' trading which is not subject to the rules of a prescribed market , the behaviour may be "in relation to the qualifying investment " when it is ultimately "traded on" the prescribed market.

Behaviour which occurs "in relation to a qualifying investment" traded on a prescribed market falls within the scope of the regime. This would include further offerings of shares by an issuer that has already issued shares which "trade on" a prescribed market (that is, an existing tranche is already traded on a prescribed market ). For bonds, behaviour in relation to a bond being tapped which trades on a prescribed market would also be behaviour "in relation to a qualifying investment" traded on a prescribed market.

Any behaviour whose effect persists until the security is traded on an exchange will be behaviour in relation to that security . New issues by a previously unlisted issuer (for example, initial public offers ("IPOs")) will not be "traded on" a prescribed market ahead of the issue, however they will fall within the scope of the regime if information which is disclosed about them before the security trades on a prescribed market , for example, in a prospectus, is false or misleading. So, if a false or misleading impression persists if and when the instrument is actually traded and thereby falls within the scope of the regime, that behaviour would fall within the scope of the regime. Market abuse may therefore be said to occur when the security trades on the prescribed market. Note too that if the price is false at the start of trading, and the stabilising manager knows or ought reasonably to know this, the price stabilising rules safe harbour may not be available (MAR 2.2.2 G, MAR 2.3.8 G).

Application

This guidance is relevant to persons who manage convertible and exchangeable bond issues and persons who issue, sell or purchase convertible and exchangeable bonds. The guidance details the FSA 's views about the application of the market abuse regime to the current market practices employed when pre-hedging such issues.

Summary

In brief, this guidance states that for convertible and exchangeable bonds whose launch is required to be disclosed to the market, dealing or arranging in the underlying shares or related products, before disclosure to the market and while in possession of information about the launch, is likely to amount to market abuse. For example, it is likely to be market abuse for a person, who possesses information about a disclosable convertible or exchangeable bond launch, to sell the underlying shares short before the announcement of the launch, with a view to facilitating the purchase of the underlying shares after the announcement.

However, there are circumstances where the FSA believes the regular user is likely to view certain pre-hedging activity as acceptable, and these are noted in paragraphs 18 to 21 (Pre-arranging to borrow shares from the issuer) and 23 to 26 (Exchangeable bond issues) of this annex.

Meaning of "convertible and exchangeable bonds"

There are many different types of convertible and exchangeable bonds; but this guidance uses the following definitions:

(1)

convertible bonds are bonds issued by a company for the purpose of raising capital and are convertible into the company's own shares; the company issues new shares in time for the conversion; invariably the new shares will be fungible with existing shares;

(2)

exchangeable bonds are bonds issued by a company and are convertible into a third party's shares; in this case, the issuer normally has an existing holding in the underlying shares and is disposing of a substantial shareholding.

Detailed guidance

For behaviour to amount to market abuse, the conditions set out in sections 118(1)(a), (b) and (c) of the Act must be satisfied (as described in MAR 1.1.3 G).

Behaviour in relation to a qualifying investment

Under section 118(1)(a), behaviour must occur in relation to a qualifying investment traded on a prescribed market (see MAR 1.11.2 G for a list of these prescribed markets). As explained in MAR 1.11.6 E, section 118(6) provides non-exhaustive guidance on what will amount to behaviour in relation to a qualifying investment. In particular, behaviour can occur in relation to a qualifying investment traded on a prescribed market where the behaviour is not in a qualifying investment. This is because such behaviour can nevertheless have a damaging effect on prescribed markets. This includes behaviour in relevant products as discussed in MAR 1.11.9 E.

Consequently, for behaviour in relation to the issue of a convertible or exchangeable bond to come within the scope of the market abuse regime, it is necessary that:

(1)

the underlying shares into which the bond can be converted are traded on a prescribed market and therefore the convertible or exchangeable bond is a relevant product; or

(2)

the convertible or exchangeable bond is traded on a prescribed market.

Behaviour which amounts to misuse of information

Under section 118(1)(b) of the Act one or more of the conditions in section 118(2) have to be met in order for behaviour to amount to market abuse (see MAR 1.1.3 G). MAR 1.4.4 E discusses the condition in section 118(2)(a) (referred to here as "misuse of information"). MAR 1.4.4 E states that behaviour will amount to market abuse in that it will be a misuse of information where all the circumstances in MAR 1.4.4 E (1) to MAR 1.4.4 E (4) are present.

MAR 1.4.4 E (1) applies only where a person deals or arranges deals. In using these defined terms, MAR 1.4.4 E (1) has a broad compass, since the Glossary definitions of dealing and arranging both have an extended meaning Dealing, for instance, relates to the activity of dealing as described in paragraph 2 of Schedule 2 to the Act, and thus does not include the various exceptions that would have applied had the term been defined by reference to the Regulated Activities Order. Further, arranging cover not only arranging (bringing about) deals in investments within article 25(1) of the Regulated Activities Order and making arrangements with a view to transactions in investments within article 25(2) of the Regulated Activities Order , but agreeing to carry on either of those activities within article 64 of the Regulated Activities Order. Accordingly, the following behaviour, in particular in relation to convertible or exchangeable bonds, falls within one or other of the Glossary definitions of dealing and arranging:

(1)

selling the underlying shares short;

(2)

entering into a derivative transaction to sell the shares;

(3)

borrowing the underlying shares;

(4)

entering into some types of credit derivatives in relation to the convertible or exchangeable bond.

10.

The following behaviour in relation to convertible or exchangeable bonds will also fall within one or other of the Glossary definitions of dealing or arranging:

(1)

icing (that is, locating and reserving shares from prospective lenders) the underlying shares on a formal basis such that the arrangements are contractual in nature and so binding on the parties, such as 'pay to hold' arrangements; since the borrowing of stock involves a transaction of sale and purchase, this applies whether the formal, contractual, icing is with a view to subsequent borrowing by the person icing the shares or is for borrowing by a third party;

(2)

informal, non-contractual, icing arrangements, for example, where the icing of the underlying shares involves the informal reservation of the shares, the terms not being offered or agreed until after the disclosure to the market; in this case, however, the definitions cover the case only where the icing is undertaken on behalf of a third party.

11.

Where icing arrangements are informal and non-contractual in nature, and are with a view to subsequent borrowing for the person icing the shares, they will fall outside both the definition of dealing and that of arranging. This would be because the fact that the entity making the icing arrangements is to become a principal to the stock loan means that there would be no agreement to borrow (in other words deal) within paragraph 2 of Schedule 2 to the Act and, in relation to arranging, the exclusion in article 28 of the Regulated Activities Order would apply. However, even if such icing does not come within the circumstances outlined in MAR 1.4.4 E (1), it will still fall within section 118(1)(b) of the Act and the market abuse regime. MAR 1.4.4 E does not operate to exclude from the market abuse regime all behaviour falling outside the circumstances outlined in MAR 1.4.4 E (see section 122(2) of the Act and MAR 1.2.13 E). For this reason, the guidance that is provided in this annex on the application of the remaining elements in section 118(2)(b) and the regular user test in section 118(1)(c) will also apply to icing that is outside the Glossary definitions of dealing and arranging and thus not covered by MAR 1.4.4 E (1).

12.

This guidance concerns current market practice when pre-hedging the issue of convertible and exchangeable bonds. By definition, such pre-hedging (and its constituent activities) is behaviour "based on" the information that there is to be an issue of a convertible or exchangeable bond. Therefore, this aspect of MAR 1.4.4 E (1) is satisfied.

13.

MAR 1.4.4 E (2) states that the information must not be generally available. The information that a forthcoming convertible or exchangeable bond is going to be launched is not generally available before the launch (see MAR 1.4.5 E which contains criteria for assessing whether information is generally available).

14.

MAR 1.4.4 E (3) states that the information must be relevant information. The knowledge that there is going to be a forthcoming issue of a convertible or exchangeable bond is relevant information for all dealing and arranging activity identified at paragraph 9 (see MAR 1.4.9 E to MAR 1.4.11 E which contain criteria for assessing when information is relevant).

15.

However, if a person is speculating that an issue is imminent or trading on the basis of rumour, it would be acceptable to undertake dealing or arranging in the underlying shares, or in the securities of the issuer, provided the person is satisfied that he is basing his behaviour on information that is generally available, or that the information is not relevant.

Application of the regular user test

16.

MAR 1.4.4 E (4) considers specific aspects of the regular user test in section 118(1)(c) of the Act in the context of the misuse of information. MAR 1.4.4 E (4) requires the information to relate to matters which the regular user would reasonably expect to be disclosed to users of the particular prescribed market. If there is a legal or regulatory requirement to disclose the issue of the convertible or exchangeable bond to the market, the regular user would reasonably expect that no dealing or arranging should occur before this disclosure is made (see MAR 1.4.12 E to MAR 1.4.15 E). An exception to this may exist if the trading information safe harbour provided by MAR 1.4.26 C applies, or in the circumstances outlined in paragraphs 18 to 21 (Pre-arranging to borrow shares from the issuer) or 23 to 26 (Exchangeable bond issues).

17.

Where there is no legal or regulatory requirement (such as that contained in the listing rules) to disclose the issue, current market practice is that there is no routine announcement of the issue. Therefore, in the absence of a legal or regulatory requirement to disclose the issue, the regular user would not reasonably expect the information to be disclosed.

Pre-arranging to borrow shares from the issuer

18.

The regular user may consider that it is acceptable behaviour for the manager of a convertible or exchangeable bond issue to arrange to borrow shares from the issuer or a related party of the issuer before the announcement of the launch of the issue. The shares held by the issuer or a related party are often not part of the lending market, and the issue manager may need to have access to the issuer's or a related party's pool of available shares in order to facilitate the transaction; for example, by meeting post-announcement hedging demand. Although there may be stock available in the market from other lenders, the need to pre-arrange to borrow the issuer's or a related party's shares may be critical to the success of the issue.

19.

In determining that such behaviour is acceptable, the regular user is likely to view borrowing shares from the issuer or a related party as an acceptable practice in circumstances where:

(1)

there is a genuine need to prearrange to borrow the shares to facilitate the issue;

(2)

the parties to the pre-arranged borrowing are all aware of the forthcoming bond issue; and

(3)

other market participants are not disadvantaged (see paragraphs 20 and 21).

20.

There will be circumstances when the regular user is likely to regard borrowing from the issuer or a related party as unacceptable. An example would be if issuers or related parties withdraw stock from the lending market in order to lend it to the issue manager in such a way that other market participants are disadvantaged.

21.

For the issuer or a related party, when considering whether it is acceptable to make stock available to the issue manager, account needs to be taken not only of the extent to which stock will or may be lent to the issue manager, but also of the extent to which the stock has been available to the lending market. Factors which will be relevant in making this assessment are how recently and in what volume the stock to be lent to the issue manager has been available to the market. If the stock has been available to the lending market in some volume, and the amount that is to be lent to the issue manager will substantially reduce that volume, issuers or related parties need to be aware that withdrawing the stock may mean that they are engaging in market abuse by creating an abusive squeeze (MAR 1.6.13 G).

Trading information safe harbour

22.

Under MAR 1.4.26 C, behaviour will not amount to a misuse of information if it is based on information about a person's intention to deal or arrange deals. However, the protection of this safe harbour does not apply if the dealing or arranging is based on information relating to new offers, issues, placements or other primary market activity (see MAR 1.4.26 C (2)). Convertible bond issues are likely to be primary market activity, as they invariably involve the issue of new securities, in the form of the bond, and may also involve the contemporaneous issue of new shares; if so, therefore, the protection of the safe harbour will not be available to these products.

Exchangeable bond issues

23.

Similarly, an exchangeable bond issue which has been the subject of an extensive marketing effort is likely to be part of the primary market, because it is itself a security, and therefore will also fall outside the protection of the safe harbour. It may be suggested that an exchangeable bond issue which is privately negotiated or structured has many of the characteristics of secondary market trades, and should therefore benefit from the trading information safe harbour in MAR 1.4.26 C. However, since, as explained in paragraph 22, the exchangeable bond involves the listing of new securities, even such an issue is likely to be considered as primary market activity.

24.

Nonetheless, in determining whether there is an exposure to the market abuse regime taken as a whole, a distinction can be drawn between convertible or exchangeable bond issues that are the subject of a public marketing effort and consequently have an impact on a substantial number of market participants, and those exchangeable issues that are privately negotiated or structured transactions.

25.

Factors which should be taken into account when drawing the distinction in paragraph 24 are:

(1)

how widely distributed the issue is; and

(2)

whether such transactions are routinely announced prior to completion (as opposed to purely ex-post disclosures, for example, under the listing rules).

26.

Although the privately negotiated or structured transactions referred to in paragraphs 24 and 25 may not benefit from the trading information safe harbour, it is likely that the regular user would view pre-hedging of these issues by parties to the transaction as acceptable behaviour. Accordingly, behaviour amounting to dealing or arranging as stated in paragraph 9 of this annex in connection with such exchangeable bond issues will not amount to market abuse because the regular user test in section 118(1) (c) of the Act is not satisfied.

The application of MAR 2 (Price stabilising rules)

27.

The regular user would expect relevant market participants to comply with the requirements for stabilising activity as set out in MAR 2 where these are applicable; they include the making of a public announcement of a new issue before undertaking any stabilising action.

01/12/2001

MAR 1 Annex 4

Frequently asked questions on the Code of Market Conduct

01/12/2004

Structure of the Code

Is behaviour in relation to share options and contracts for differences within the scope of the regime?

Behaviour in relation to share options falls within the scope of the regime if the subject matter of the share options is shares which trade on a prescribed market (see MAR 1.11.2 G). Behaviour in relation to contracts for differences will also fall within the scope of the regime where that behaviour is in relation to a qualifying investment. (See MAR 1.11.6 E to MAR 1.11.11 E.)

How are the safe harbours (the 'C' provisions) in the Code applied? What status does the guidance in the Code have?

The safe harbour provisions denoted as 'C' are conclusive and are descriptions of behaviour that does not amount to market abuse (market abuse (section 118(8), section 119(2)(b) and section 122(1) of the Act ). If a person behaves in a way that is described in the Code as behaviour that does not amount to market abuse, his behaviour will not amount to market abuse. The descriptions in the Code of behaviour which amounts to market abuse carry evidential weight and are denoted as 'E' (section 119(2)(c) and section 122(2) of the Act ), that is they may be relied on in so far as they indicate whether or not that behaviour should be taken to amount to market abuse.

The guidance provisions in the Code denoted as 'G' are issued under section 157 of the Act. Wherever guidance is used, it is not binding on those to whom the Act (and in this case the Code) applies, nor does it have evidential effect. It need not be followed to comply with a particular requirement. (See paragraphs 28 to 31 of the Reader's Guide to the Handbook for a fuller discussion.)

If the FSA is not the regular user, who is, and how will you establish what the regular user expects?

The regular user is neither a real person nor a group of real people. One does not establish the expectation of the regular user by taking a survey of actual market users. The test operates as an objective standard: just because 'everyone does it' does not necessarily make a particular practice acceptable. In practice, we may well speak to people from a market background to gauge what they as market participants consider the regular user's expected standards would be, in a particular context. Initially we will have to form our own view about whether particular behaviour is acceptable. We are not the regular user but we do have to give guidance on the standards the regular user is likely to expect. Ultimately, the Tribunal will decide the standards the regular user expects.

Why are so many Listing rules and Takeover Panel rules 'safe harboured' in the Code when only one exchange rule receives the same treatment?

Our overall philosophy for granting safe harbours has been to identify those rules that require or expressly permit certain behaviour or embody certain standards of care which, absent the safe harbour, could amount to market abuse. MAR 1.2.8 E explains how the regular user would be likely to take into account compliance with the rules of prescribed markets, the FSA and the Takeover Panel in deciding whether a person observed the standard of behaviour expected in his or her position in relation to the market. MAR 1.5.25 C is a safe harbour covering required reporting or disclosure to prescribed markets.

Behaviour under the Code

What examples are there where accepted practice is unacceptable? What will the FSA do when it identifies an accepted practice that falls below expected standards?

Please refer to MAR 1.2.11 G.

What is the position of an intermediary who executes an abusive transaction? When applying the market abuse regime to electronic broking and order-routing mechanisms, including voice brokers, are the standards expected of each type of intermediary equivalent?

Our main focus will be on the client who originated the transaction. The regular user is likely to consider a client who submits an abusive trade to an intermediary for execution as engaging in market abuse. But, in addition, the client may have required or encouraged the intermediary to engage in market abuse or the intermediary may have participated in the abuse (see MAR 1.8.2 G (1)). The intermediary's behaviour in executing the transaction for the client will not amount to either required or encouraged or market abuse (see MAR 1.8.8 G) unless the intermediary knew or ought reasonably to have known that the originator of the transaction was engaging in market abuse (see MAR 1.1.3 G (3) and MAR 1.8.8 G).

The market abuse regime does not impose any new positive obligations on intermediaries. They are already expected to comply with the applicable rules (such as the Principles and the RIE rules). The regular user's assessment of behaviour by an intermediary would likely take into account compliance with applicable rules. So, the regular user would recognise differences in the standards of behaviour expected of different kinds of intermediaries.

Operational issues

When will the FSA investigate market abuse on a prescribed market and when will the operator of a prescribed market do it?

We expect that the operator of a prescribed market will investigate and take enforcement action where:
? the misconduct is limited to the prescribed market;
? they have jurisdiction over all the persons concerned; and
? the operator's enforcement powers are sufficient to deal with the misconduct.
The operators of prescribed markets clearly have a continuing essential role as front-line regulators. We are not seeking to take over their role. It is likely that we will work together with the operators on some cases. In other cases, we will conduct the investigation and any subsequent enforcement action. We have a close working relationship with the operators and will discuss matters on a case-by-case basis, to decide which body is best placed to take each case forward. As we made clear in the Enforcement manual, we will co-ordinate action with the operators to ensure cases are dealt with effectively and fairly. The FSA and the operators published operating arrangement guidelines on 20 November 2001 which are available at www.fsa.gov.uk/pubs/other/market_conduct/index.html#mc (see also ENF 14.9 (Action involving other UK regulatory authorities)).

When will the FSA investigate market misconduct during a takeover bid?

We recognise the importance of minimising disruption to the takeover bid process and expect parties to use all of the procedures for complaint to the Takeover Panel ("Panel"). We also expect that the Panel will investigate and take action, save in exceptional circumstances, during the course of a takeover bid (for full details see the Operating Guidelines document on

www.fsa.gov.uk/pubs/other/market_conduct/index.html#mc). The exceptional circumstances in which we will consider action during the course of a takeover bid are:
? where the Panel asks us to use our powers to impose penalties, or our powers of injunction or restitution;
? where the suspected misconduct falls within the misuse of information prohibition under the market abuse regime (section 118(2)(a) of the Act) or Part V of the Criminal Justice Act 1993 (insider dealing);
? where the Panel is unable to investigate properly due to a lack of co-operation by the relevant person;
? where a person has deliberately or recklessly failed to comply with a Panel ruling;
? where the suspected misconduct extends to securities or a class of securities which may be outside the Panel's jurisdiction;
? where the suspected misconduct threatens or has threatened the stability of the financial system.
There is general guidance on the interaction between the FSA and other UK regulatory authorities, including the Panel, in the Handbook at ENF 14.9 (Action involving other UK regulatory authorities).

Will market participants have to wait for an enforcement action to find out if a behaviour is unacceptable?

Please refer to MAR 1.2.11 G.

01/12/2001

MAR 2

Stabilisation

MAR 2.1

Application

01/12/2004

APPLICATION: WHO?

MAR 2.1.1

(1) This chapter applies to every firm.

(2) For the purposes of section 118(8) of the Act, behaviour (whether by a firm or not) conforming with the price stabilising rules does not amount to market abuse.

01/12/2001

MAR 2.1.2

(1) This chapter is available to any person, whether that person is a firm or not, who wishes to show:

(a) that he acted in conformity with the price stabilising rules for the purposes of paragraph 5(1) of Schedule 1 to the Criminal Justice Act 1993 (Insider dealing); or

(b) that he acted or engaged in conduct in conformity with the price stabilising rules for the purposes of section 397(4) or (5)(b) of the Act (Misleading statements and practices); or

(2) Any person concerned with an offer for cash of securities might wish to rely on this chapter; there are no legal restrictions on the appointment of stabilising managers to whom this chapter may apply. However, the main focus of the chapter is on lead managers when they are contemplating or carrying out an offer for cash of securities. Agents appointed by lead managers, on the basis contemplated by this chapter, may also find the chapter especially relevant.

01/12/2001

APPLICATION: WHAT?

MAR 2.1.3

This chapter applies to an offer for cash, that is, an offer of securities:

(1) where the securities are investments falling within paragraphs 76, 77, 78, 79 or 80 of the Regulated Activities Order;
(2) where the offer for cash is to be, is, or has been, made at a specified price payable in sterling or another currency;
(3) where those securities:

(a) have been admitted to trading (or are the subject of an application for admission to trading) on an exchange or other institution included in MAR 2.1.5 G; or
(b) are, or may be, traded under the rules of the International Securities Markets Association;

(4) where the total cost of the securities subject to the offer at the offer price is at least £15,000,000 (or its equivalent in another currency); and
(5) where the offer is public in character and is to be, is, or has been subject of a public announcement.

01/12/2001

MAR 2.1.4

The effect of MAR 2.1.3 R is to include both initial publicoffers and publicoffers of additional securities to rank alongside securities already in issue. An offer is likely to be regarded as public in character where it is made in a prospectus. Other offers that may be regarded as public are offers to a section of the public, placements that are not essentially private and distributions. But the use of the word "offer" and the fact that there has to be a public announcement of the offer shows that a sale, for example by means of a block trade, of securities already in issue is not included.

01/12/2001

MAR 2.1.5

Exchanges (see MAR 2.1.3 R (3))

Application : securities to admitted to trading on the following exchanges are within the scope of the price stabilising rules (seeMAR 2.1.3 R (3)).
A recognised investment exchange
A recognised overseas investment exchange
A regulated market
Other specific exchanges as listed in MAR 2 Annex 1

01/12/2001

APPLICATION: WHERE?

MAR 2.1.6

This chapter:

(1) so far as it provides a defence for any person, has the same territorial application as the provision which is alleged to have been contravened; and

(2) in its application to a firm for purposes other than those falling within (1), applies to the firm's business carried on from an establishment in the United Kingdom.

01/12/2001

MAR 2.1.7

There are specific provisions in MAR 2.8 about action for stabilising purposes in conformity with provisions made by certain overseas authorities. Accordingly action by persons not present in the United Kingdom, but where the action may have an effect in the United Kingdom, may have to be assessed in terms of the general provisions in this chapter, or the specific provisions in MAR 2.8.

01/12/2001

MAR 2.1.8

The defences to legal or regulatory procedures referred to in MAR 2.1.6 R (1) and listed at MAR 2.1.2 G (1) are conferred by rules made under section 144 of the Act (price stabilising rules); this means that MAR 2.6 (Management of stabilisation) and MAR 2.7 (Recording of action taken), which are made under section 138 of the Act, and apply only to authorised persons, are not relevant for the purposes of such a defence.

01/12/2001

RIGHTS OF ACTION FOR DAMAGES

MAR 2.1.9

A contravention of the rules in MAR 2 does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).

20/09/2001

MAR 2.2

Purpose

01/12/2004

MAR 2.2.1

The purpose of this chapter is to provide rules permitting, but also regulating, price support for offers of equities and bonds, including new issues such as initial public offers and offers of securities of the type and class already traded in the market. It prescribes the circumstances in which the stabilising manager and others acting for him are permitted to support the prices of the relevant securities offered for a limited period after the offer. This is to maintain an orderly initial market in the securities offered, and potentially therefore to facilitate new offers and reduce the costs to enterprises involved in the making of new offers of their securities. The stabilising manager and his agents are allowed to exert upward pressure on the price in the cash market, by all means permitted by the price stabilising rules, including by the purchase of relevant securities previously sold short. Under the rules in this chapter, there can be only one stabilising manager in respect of any particular offer.

01/12/2001

GENERAL EFFECT OF THE RULES

MAR 2.2.2

The general effect of this chapter is to enable the stabilising manager of an offer of securities to enter into the market personally, or through specially appointed agents, to buy or agree to buy securities in order to support (though not to suppress) the market price of the relevant securities being offered. He will, however, be free to do this only if:

(1) the stabilising period is still running;

(2) he has taken the necessary preliminary steps envisaged by MAR 2.3 and, if applicable, MAR 2.7 (relating to warning the market of the possibility of stabilising action, and records of action taken);

(3) the price is not already false at the start of the stabilising period under MAR 2.3.8 G; and

(4) the limits set by MAR 2.5 as to the maximum price at which stabilising action may be taken are not exceeded.

01/12/2001

MAR 2.2.3

During the stabilising period the stabilising manager may do any or all of the following:

(1) purchase, or agree to purchase, any of the relevant securities (or associated securities) with a view to supporting the market price of the relevant securities; and

(2) offer or attempt to do anything in (1) with a view to supporting the market price of the relevant securities.

01/12/2001

MAR 2.2.4

But the stabilising manager will not be able to rely on the price stabilising rules if, at the time of the relevant act or omission, he knew or should reasonably have known that:

(1) the market had not been properly informed in accordance with MAR 2.3.2 G(1) and (2); or

(2) proper records are obliged to be but have not been or are not being kept in accordance with MAR 2.3.2 R (3); or

(3) the price of any associated securities or of the relevant securities was already false at the time when the offer price was determined in the circumstances described at MAR 2.3.8 G.

01/12/2001

MAR 2.3

Preparation before and restrictions upon stabilising action

01/12/2004

MAR 2.3.1

Before stabilising action is taken, the stabilising manager is required (under MAR 2.3.2 G) to take, or check that others have taken, proper steps to inform the market (and, so far as relevant, the issuer) that stabilising action may be taken and (under MAR 2.3.8 G) to verify that the price of any relevant securities or associated securities is not already false. He must also:

(1) be satisfied (under MAR 2.3.2 G) that proper systems have been set up (where required) for the central recording of any stabilising action; and

(2) (under MAR 2.3.9 G) not stabilise shares and certificates associated to bonds, loans, debentures, etc, if one is to be convertible into the other but the terms of conversion have not yet been announced.

01/12/2001

MAR 2.3.2

The stabilising manager may not take any stabilising action in any relevant securities or associated securities in accordance with this chapter unless he has taken all reasonable steps to satisfy himself that:

(1) from the beginning of the introductory period (or where relevant the period mentioned in MAR 2.3.53 (3)(b)) adequate disclosure is made, in relevant communications issued by or on behalf of the issuer or the stabilising manager, of the fact that stabilising action may take place in relation to the offer;

(2) any requirement of the relevant exchange (see MAR 2.5.6 R note (2)) or other institution on which the relevant securities or associated securities are or will be traded (see MAR 2.1.3 R (3)) to inform it that stabilising action in those securities may take place during the stabilising period has been complied with;

(3) the stabilising manager has established the register required by MAR 2.7.2 R (1) (if that paragraph is binding upon him) for recording each stabilising action effected by him in the relevant securities or associated securities and the matters required to be recorded by MAR 2.7.2 R (2) in relation to it; and

(4) where the offer relates to an issue of relevant securities the issuer has been informed of the existence of the FSA informational guidance (MAR 2 Annex 2), either in relation to the offer in question or to a previous one.

01/12/2001

MAR 2.3.3

(1) A stabilising manager who is required to comply with MAR 2.3.2 R (1) should ensure that the communications there referred to, if they fall within items 1 to 5 of MAR 2.3.4 E, contain the words suggested in, or otherwise fairly comply with, any relevant note to that table.

(2) Compliance with (1) may be relied on as tending to establish compliance with MAR 2.3.2 R (1).

01/12/2001

MAR 2.3.4

Communication referring to the offer (see MAR 2.3.2 R (1))

Item

Communication

Relevant Notes (See MAR 2.3.5 )

Any screen-based statement

1, 2, 3, 5 and 6

Press announcement (or other public announcement)

2, 3, 5 and 6

Invitation telex (or similar)

2, 5 and 6

Preliminary offering circular (or draft prospectus)

4, 5 and 6

Final offering circular (or prospectus)

4, 5 and 6

01/12/2001

MAR 2.3.5

Notes to MAR 2.3.4 E

(1) Item 1 extends to any statement made by the stabilising manager or issuer on screen facilities (whether provided by the stabilising manager or not) conveying prices for a purchase or sale of securities.

(2) For items 1, 2 and 3, adequate disclosure is given if the communication contains some indication of the fact that the offer may be stabilised in accordance with the price stabilising rules. The term "stabilisation / FSA" is sufficient for this purpose. During the introductory period a reference to the future prospectus or to the prospectus can be used instead if preferred.

(3) Items 1 and 2 apply from the beginning of the shorter of two periods, that is:
(a) the introductory period; or
(b) the period beginning 45 days before the day proposed for the issue of the relevant securities and ending with the start of the stabilising period.

(4) For Items 4 and 5 adequate disclosure is given if the communication contains wording substantially similar to the following:
"In connection with this [issue] [offer ], [name of stabilising manager ] [or any person acting for him] may over-allot or effect transactions with a view to supporting the market price of [description of relevant securities and any associated securities] at a level higher than that which might otherwise prevail for a limited period after the issue date. However, there may be no obligation on [name of stabilising manager] [or any agent of his] to do this. Such stabilising, if commenced, may be discontinued at any time, and must be brought to an end after a limited period."

(5) Where any communication referred to in items 1 to 5 is not to be issued to or directed at persons in the United Kingdom , the notice required by those items may be adapted or omitted.

(6) Where any communication referred to in items 1 to 5 is to be issued to or directed at persons in the United Kingdom and persons elsewhere, the notice required by those items may be adapted or omitted so as not to require the stabilising manager or any agent of his to commit any breach of any legal rule or requirement in respect of any communication issued to or directed at persons outside the United Kingdom.

01/12/2001

MAR 2.3.6

The requirement in MAR 2.3.2 R (1) to make adequate disclosure in communications does not apply to any communication which is not mentioned in table MAR 2.3.4 E.

01/12/2001

MAR 2.3.7

An FSA consumer factsheet has been prepared which explains to potential investors the significance of the fact that stabilisation may take place in the relevant securities offered. The factsheet is available on the FSA's website and may in addition be obtained from the FSA by post, free of charge. The stabilising manager acting for the issuer should consider drawing attention to the availability of this factsheet in prospectuses which are aimed at private customers.

01/12/2001

MAR 2.3.8

(1) The stabilising manager may not take stabilising action in any case where:

(a) there are in existence associated securities;

(b) at the time when the offer price of the relevant securities was determined, the market price of the associated securities was falsely higher than the true market price; and

(c) the stabilising manager knew or ought reasonably to have known that the falsity in the market price was attributable in whole or in part to any act or course of conduct on the part of any person which was in breach of section 397(2) or (3) of the Act.

(2) The stabilising manager may not take stabilising action in any case where:

(a) at the time when the offer price of the relevant securities was determined, the market price of the relevant securities or of rights to them, whether in informal trading or otherwise, was falsely higher than the price which would otherwise have prevailed; and

(b) the stabilising manager knew or ought reasonably to have known that the falsity in the market price was attributable in whole or in part to any act or course of conduct on the part of any person which was in breach of section 397(2) or (3) of the Act.

01/12/2001

MAR 2.3.9

The stabilising manager may not take stabilising action in any case where:

(1) the relevant securities fall within article 77 (instruments creating or acknowledging indebtedness), 78 (Government and public securities) or 79 (instruments giving entitlements to investments) of the Regulated Activities Order;

(2) there are, in relation to those relevant securities, associated securities falling within article 76 (shares, etc) or 80 (certificates representing certain securities) of the Regulated Activities Order, into which those relevant securities can be converted or to the purchase of which those relevant securities give rights; and

(3) the terms of the conversion, purchase or subscription have not yet been publicly announced.

01/12/2001

MAR 2.3.10

The general purpose of MAR 2.3.9 G is to place a restriction on stabilising bonds convertible into equities, and warrants for equities, in cases where the terms of the conversion or right to purchase have not yet been settled. Prime examples would be a convertible loan stock of a public limited company, but MAR 2.3.9 G also covers similar cases such as government debt instruments which are convertible into shares, for example a privatisation in the United Kingdom or overseas.

01/12/2001

MAR 2.3.11

The stabilising manager may not take stabilising action in any case where:

(1) he or an associate of his has, in connection with the offer, an option or other right to purchase relevant securities from the issuer; and

(2) that option or right may be exercised or relied on after the start of the introductory period and during or after the remainder of the stabilising period;unless the existence and principal terms of the option or right have been disclosed in the relevant prospectus or offering document or in a public announcement.

01/12/2001

MAR 2.4

Ancillary permitted stabilising action

01/12/2004

MAR 2.4.1

MAR 2.4.2 R and MAR 2.4.3 R enable the stabilising manager to over-allot or go short of securities, so as to facilitate his subsequent purchase of them by stabilising action; and he may buy or sell on the market in order to close out or liquidate positions established by stabilising action or by going short.

01/12/2001

PERMITTED ANCILLARY ACTION

MAR 2.4.2

The stabilising manager may, subject to MAR 2.4.3 R:

(1) with a view to supporting the price of the relevant securities by action under MAR 2.2.3 R:

(a) make allotments of a greater number of the relevant securities than will be offered; or

(b) sell or agree to sell relevant securities or associated securities so as to establish a short position in them; or

(2) buy or subscribe for or agree to buy or subscribe for relevant securities or associated securities in order to closeout or liquidate any position established under (1); or

(3) sell or agree to sell relevant securities or associated securities in order to closeout or liquidate any position that has been established by stabilising action; or

(4) achieve a result equivalent to that in (3) by use of derivatives; or

(5) offer or attempt to do anything permitted by (1)(b) or (c), (2), (3) or (4).

01/12/2001

MAR 2.4.3

MAR 2.4.2 R applies only if the stabilising manager has reasonable grounds for believing, and does believe, that the requirements in MAR 2.3 have been complied with.

01/12/2001

PRICE LIMITS

MAR 2.4.4

Ancillary action under MAR 2.4.2 R (2) may be taken without regard to the limits on pricing in MAR 2.5.

01/12/2001

MAR 2.4.5

Long or short positions can be established either in the cash market or by the use of derivatives. The extent to which derivatives may be used in stabilising action or in ancillary action is strictly limited. MAR 2 contemplates the use of derivatives only on the 'selling' side, that is as permitted ancillary action, under MAR 2.4.2 R(1)(c) and (4). This is because of the need for market transparency in any purchase transactions and because of the requirements which are applicable to firms in MAR 2.7.2 R for a single record of stabilising action taken.

01/12/2001

MAR 2.4.6

MAR 2.4.2 R (2) extends to the purchase from the issuer during the stabilising period, or shortly after, by exercise of an option or other right, of further securities not previously allotted.

01/12/2001

MAR 2.5

Pricing

01/12/2004

LIMIT ON PRICING: GENERAL

MAR 2.5.1

The principal purpose of this section is to put an upper limit on the price at which certain securities may be stabilised.

01/12/2001

MAR 2.5.2

The price limits are broadly similar whether the stabilising action is concerned with relevant securities or associated securities (including call options). However, the price limits do not extend to debt securities in the form of bonds, etc, or investments similar to debt securities such as convertibles or exchangeables. Pricing for them is subject instead to the requirement in MAR 2.2.3 R that the stabilising action is taken to support the market price.

01/05/2003

MAR 2.5.3

The initial stabilising price (Price X) cannot exceed the offer price (or starting price) (Price Y), and subsequent stabilising action must equally be at or below the level of Price X. If there are no sales and purchases which are independent of the stabilising manager on both sides on the relevant exchange above Price X, the stabilising manager can operate at a price or at prices below Price X, moving up or down in that area as he wishes. But if an independent buyer and seller do a deal on the relevant exchange, at a price (Price Z) between Price X and Price Y, then the stabilising manager has a new maximum price (Price Z) instead of Price X.

01/12/2001

MAXIMUM PRICES

MAR 2.5.4

(1) No bid may be made or transaction effected in the case of action described in MAR 2.2.3 R at a price higher than any relevant price indicated in accordance with MAR 2.5.5 R (including any relevant note in MAR 2.5.6 R).

(2) The prohibition in (1) does not apply to the purchase of, the agreement to purchase, or an offer or attempt to purchase or to agree to purchase, investments that fall within:

(a) article 77 or 78 of the Regulated Activities Order (bonds, etc); or

(b) article 77 or 78 and also fall within articles 79 (instruments giving entitlements to investments), 80 (certificates representing certain securities) or 83 (options); or

01/05/2003

MAR 2.5.5

Limits on pricing (see MAR 2.5.4 R (1))

Time of Action

Column A

Column B

Column C

Relevant securities (including associated securities which are in all respects uniform with them)

Associated securities (other than associated call options) excluding those in column A

Associated call options

(1) Initial stabilising action

The offer price

The market bid price of the associated securities at the beginning of the stabilising period

The market price of an option at the beginning of the stabilising period

(2) Later, but where there has been a deal at a price above the stabilising price on the relevant exchange

The offer price, or the price at which that deal was done, whichever is the lower

The market bid price in B(1), or the price at which that deal in the associated securities was done, whichever is the lower

The market price in C(1), or the price at which that deal in an option was done, whichever is the lower

(3) Later, but where there has been no deal in (2)

The offer price, or the initialstabilising price, whichever is the lower

The market bid price in B(1), or the initial stabilising price for the associated securities, whichever is the lower

The market price in C(1), or the initial stabilising price of the option, whichever is the lower

01/05/2003

MAR 2.5.6

Pricing notes (see MAR 2.5.5 R)

(1) Deals done. For the purposes of MAR 2.5.5 R (2), a deal done by or on the instructions of the stabilising manager does not count.
(2) Relevant Exchange. For the purposes of MAR 2.3.2 R (2) , MAR 2.5.5 R (2) and MAR 2.5.6 R, the relevant exchange means the investment exchange which the stabilising manager reasonably believes to be the principal investment exchange on which those securities, or as the case may be options, are dealt in at the time of the transaction.
(3) (Deleted).
(4) References in column B of MAR 2.5.5 R to associated securities do not include call options.
(5) Currency fluctuations. Where the price of any relevant securities or associated securities on the relevant exchange is in a currency other than the currency of the price of the securities to be stabilised, stabilising bids may be made or transactions effected at a price that reflects any change in the relevant rate of exchange; but this does not permit stabilising action, in column A of MAR 2.5.5 R, at a price above the equivalent, in the other currency, of the offer price in the currency on the relevant exchange.
(6) New securities: Where there is no market bid price for any associated securities (including associated call options) at the beginning of the stabilising period because those securities or options are not in existence or capable of being traded at that time, MAR 2.5.5 R shall be read as if references to the market bid price of theassociated securities or options at the beginning of the stabilising period were a reference to the first market bid price of the associated securities or options during thestabilising period of which the stabilising manager is, or reasonably should be, aware.

01/05/2003

MAR 2.6

Management of stabilisation

01/12/2004

MAR 2.6.1

The purpose of this section and of section 2.7 is to provide an orderly structure for the management of stabilising action even where it is to be carried out on a devolved basis, whether in the United Kingdom or elsewhere. The central management has to be in the hands of one stabilising manager. If authorised in the United Kingdom, the stabilising manager has to set up, operate and be legally responsible for a single stabilisation register MAR 2.7.2 R) which must be kept in the United Kingdom or be capable of being inspected by the relevant regulators. These sections accordingly build on the base requirement for authorised persons at MAR 2.3.2 R (3)

01/12/2001

MAR 2.6.2

(1) This section, and section MAR 2.7, apply only where the stabilising manager is a firm or is employed by a firm.

(2) Where the stabilising manager is employed by a firm, this section and MAR 2.7 shall have effect as if the obligations imposed on the stabilising manager were imposed on the firm.

01/12/2001

MAR 2.6.3

No bid may be made or transaction effected in the course of stabilising action unless the stabilising manager:

(1) has established the relevant register in compliance with MAR 2.7.2 R; and

(2) is in compliance with the registration requirements in MAR 2.7.2 R in respect of all earlier transactions effected in the course of stabilising action in connection with the offer in question.

01/12/2001

MAR 2.6.4

No bid may be made or transaction effected in the course of stabilising action except by:

(1) the stabilising manager himself; or

(2) a person appointed by the stabilising manager to act as his agent on terms which:

(a) make the agent responsible to the stabilising manager; and

(b) make the stabilising manager as responsible to others for the acts or omissions of the agent as if they had been done or omitted by the stabilising manager.

01/12/2001

MAR 2.6.5

(1) The stabilising manager may not during the stabilising period enter into a transaction as principal in relevant securities or associated securities with any agent of his appointed under MAR 2.6.4 R.

(2) Paragraph (1) does not apply if, at the time of the transaction, neither the stabilising manager nor the agent knew or could reasonably have been expected to know the identity of his counterparty.

(3) Paragraph (1) does not apply where:

(a) the transaction between the stabilising manager and his agent is undertaken solely for the purpose of re-allocating the economic risk of positions that were taken by the stabilising manager and his agent in the course of stabilising action and is priced accordingly; and

(b) the relevant securities are, and the transactions are in, investments that:

(i) fall within article 77 or 78 of the Regulated Activities Order (bonds, etc), or article 79 (instruments, etc) or 80 (certificates, etc) which confer rights only in respect of investments falling within article 77 or 78 ; and

(ii) are not exchangeable for or convertible into, and do not give rights to acquire, dispose or subscribe for, investments falling within article 76 of the Regulated Activities Order (shares, etc), or articles 79 or 80 which confer rights in respect of investments falling within article 76.

01/01/2003

MAR 2.6.6

MAR 2.6.5 R prohibits transactions between a stabilising manager and his agent unless it is not reasonable to expect both the principal and agent to know the identity of their counterparty or where MAR 2.6.5 R (3) applies. MAR 2.6.5 R (3) is designed to permit a transaction between a stabilising manager and his agent that takes place in the debt markets, typically at the end of the business day or stabilising period, that "squares up" positions taken in the course of stabilising action. The reference to price in MAR 2.6.5 R (3)(a) reflects the need to be mindful that although the transaction may in practice, for example, be effected at a price that is the average of the constituent transactions, so not the prevailing market price, the purpose behind the transaction is to re-allocate economic risk established in the course of stabilising action and is not to mislead the market. MAR 2.6.5 R (3)(b) has been drafted to ensure that the prohibition in MAR 2.6.5 R (1) remains applicable to the issue of and transactions in any investment that provides a right to acquire or subscribe for, or may eventually be converted or exchanged into, a share.

01/01/2003

MAR 2.7

Recording of action taken

01/12/2004

MAR 2.7.1

For the application of this section see MAR 2.6.2 R.

01/12/2001

MAR 2.7.2

(1) The stabilising manager must establish and keep a register in respect of each offer of securities covered by this chapter.

(2) He must ensure that it contains, either in real time or updated overnight (from business day to business day):

(a) the names of all agents appointed under MAR 2.6.4 R, and details of the terms of the appointment of each;

(b) the general parameters (including the initial stabilising price) laid down by the stabilising manager for his agents and the date and time of their communication, variation or revocation;

(i) the type of security;

(ii) the unit price;

(iii) the size;

(iv) the date and time; and

(v) details of the counterparty;

(d) details of the allotment of relevant securities (allottee and amount allotted); and

(e) details (so far as known to the stabilising manager) of any deal which 'counts' as a deal at a price above the then stabilising price for the purposes of MAR 2.5.5 R(2) (pricing after independent deals).

(3) The register must be kept in the United Kingdom, or else be capable of being brought to, or reconstituted in, the United Kingdom within 48 hours of a request for access from anyone entitled to inspect it.

(4) If the register is not kept in English, it must be capable of being converted into English within the 48 hour period mentioned in (3).

01/12/2001

MAR 2.7.3

(1) During the three months from the end of the stabilising period, the stabilising manager must permit the issuer of the securities, on any business day, to inspect that part of the register which is kept under MAR 2.7.2 R (2)(c) (i) to (iv).

(2) The obligation in (1) arises only if the offer related to an issue of relevant securities.

01/12/2001

MAR 2.7.4

The register must be retained for a period of at least three years from the date of the end of the stabilising period.

01/12/2001

MAR 2.8

Overseas Stabilisation

01/12/2004

MAR 2.8.1

Under sections 144(3) and (6) of the Act, the FSA may make rules which confer a "safe harbour" in respect of one type of market manipulation (section 397(3)) on persons who act in conformity with specified provisions of foreign laws. Under that power, the FSA "specifies" certain legislative provisions having effect in the United States of America, Japan and Hong Kong. It should be noted that conformity with these provisions may assist in proceedings under section 397(3) but not in proceedings under section 397(2) nor in proceedings under Part V of the Criminal Justice Act 1993 (insider dealing). This is because of the wording of section 144(3).

01/01/2004

MAR 2.8.2

(1) A person who, in any place outside the United Kingdom, acts or engages in conduct:

(a) for the purposes of stabilising the price of investments; and

(b) in conformity with the provisions specified in (2), (3) or (3A); and

(c) in relation to an offer which is governed by the law of a country (or a state or territory in a country) so specified;is to be treated for the purposes of section 397(5) of the Act (misleading statements and practices) as acting or engaging in conduct for that purpose and in conformity with the price stabilising rules.

(2) In relation to the United States of America, the specified provisions are:Regulation M made by the Securities and Exchange Commission (17 CFR 242, # 100-105).

(3) In relation to Japan, the specified provisions are:

(a) The Securities and Exchange Law of Japan, (Law No 25, April 13 1948), Article 159, paragraphs 3 and 4;

(b) Cabinet Orders for the Enforcement of the Securities and Exchange Law of Japan (Cabinet Order 321, September 30, 1965), Articles 20 to 26;

(c) Ministerial Ordinance concerning the Registration of Stabilisation Trading (Ordinance of the Ministry of Finance No 43, June 14, 1971);

(d) Ministerial Ordinance concerning rules and otherwise governing the soundness of securities companies (Ordinance of the Ministry of Finance, No 60, November 5, 1965), Article 2.

(3A) In relation to Hong Kong, the specified provisions are:The Securities and Futures (Price Stabilizing) Rules, Cap. 571 W made by the Hong Kong Securities and Futures Commission.

(4) A person who is treated under (1) as acting or engaging in conduct in conformity with the price stabilising rules is also to be treated to an equivalent extent as so acting or engaging for the purposes of MAR 2.1.1 (2) above, and of Part XIV (Disciplinary measures) and Part XXV (Injunctions and Restitution) of the Act.

(5) The provisions in (2), (3) and (3A) are specified as they have effect from time to time, so long as this paragraph has effect.

01/12/2001

MAR 2.8.3

(1) The effect of MAR 2.8.2R (4) is to confer a defence in the following classes of cases:

(a) proceedings under Part VIII of the Act in cases of market abuse;
(b) disciplinary proceedings under Part XIV of the Act in cases of a breach of other price stabilising rules;
(c) proceedings under Part XXV of the Act (Injunctions and Restitution) in relation to market abuse or a breach of other price stabilising rules.

(2) The FSA and, if necessary, the Financial Services and Markets Tribunal and the court will need, in such cases, to consider whether, and if so how, the overseas stabilising rule has been complied with or broken in relation to conduct of the kind which otherwise would be proscribed under section 397(3) of the Act.

01/12/2001

MAR 2.8.4

The provisions in this section are separate and distinct from other provisions in these rules which may be relevant to overseas stabilisation whether by persons who are authorised in the United Kingdom or by other persons. In particular, MAR 2.6.4R enables overseas agents appointed by a UK authorised stabilising manager to obtain the benefit of the price stabilising rules.

01/12/2001

MAR 2 Annex 1

MAR 2 Ann 1R

01/12/2004

MAR 2 Annex 1

American Stock Exchange (AMEX)

Australian Stock Exchange

Bolsa Mexicana de Valores

Canadian Venture Exchange

Hong Kong Stock Exchange

Johannesburg Stock Exchange

Korea Stock Exchange

Midwest Stock Exchange

Montreal Stock Exchange

New York Stock Exchange (NYSE)

New Zealand Stock Exchange

Osaka Securities Exchange (OSE)

Pacific Stock Exchange

Philadelphia Stock Exchange

Singapore Exchange Securities Trading Limited

Tokyo Stock Exchange (TSE)

Toronto Stock Exchange

01/12/2001

MAR 2 Annex 2

MAR 2 Ann 2G

01/12/2004

Introduction

1.1

This guidance has been produced by the FSA to help issuers identify the information they might seek when engaging underwriters and stabilising managers to manage their new offers for them. stabilising managers are encouraged by the price stabilising rules to alert issuers to the existence of this guidance.

When stabilisation can be used

2.1

It is a common market practice in the United Kingdom for stabilising managers of both debt and equity issues to reserve the right to stabilise offers by including in the offer documentation wording which gives notice that the issue may be stabilised. FSA rules allow the stabilising manager/underwriter to stabilise a new offer, which means that it may purchase securities to support the price:

where the offer is for cash;

where the offer is public and is subject to the rules of an exchange specified under the price stabilising rules; and

only for a limited period, (the stabilising period).

Common market practice when undertaking stabilisation

3.1

Stabilising action involves supporting the price of securities made in public offers. The stabilising manager undertakes this action by purchasing or agreeing to purchase the relevant securities. Supporting a price may potentially lead to distortions of price signals. For the stabilising manager to obtain the 'safe harbour' (effectively a defence against a charge of market manipulation, insider dealing or market abuse) provided by the price stabilising rules, a number of disclosures must be made to the market (see 5 below).

3.2

It is common practice for the stabilising manager to over-allot a new offer as an ancillary action to stabilisation. This leaves the stabilising manager with a net short position in the securities, having pre-sold more than 100% of the issue. When the offer begins to trade in the after-market, if the price does not go above the offer price, the stabilising manager can make purchases of securities in order to close out this short position. The purchases that the stabilising manager makes to close out the position will be part of the price stabilising activity. It is common for the stabilising manager to take out an over-allotment (or Green Shoe) option, so that further securities can be obtained from the issuer at the offer price. Thus, if the price has risen, the stabilising manager can still close out the short position.

Use of the Green Shoe unconnected with stabilisation

4.1

It is possible for the stabilising manager to obtain a Green Shoe option that is not intended for the purpose of filling any short position arising from over-allotment. The reason for the option should be explicitly disclosed to the issuer. The issuer may wish to ensure that it understands why the stabilising manager wants a Green Shoe option, and may wish to secure that its agreement specifies the circumstances in which it can be exercised

FSA rules and disclosure

5.1

The price stabilising rules require the stabilising manager to make certain disclosures:

to the market, providing notification that stabilising action may be taken; and

in the prospectus, or offering circular, concerning the existence of an over-allotment or Green shoe option, and the terms on which it has been agreed.

5.2

In addition, where the stabilising manager is an authorised person in the United Kingdom, MAR 2.7.3 R gives the issuer certain rights to inspect parts of the register of stabilising action which such a stabilising manager must maintain.

Information that issuers may wish to request from the stabilising manager

6.1

When negotiating the terms of agreement for the offer , the parties will no doubt wish to consider how the offer will be managed and what information the issuer might wish to seek from the stabilising manager. In considering what information might be requested, the issuer may wish to arrange for the following:

information on how the issue is proceeding during the stabilising period (nature of demand, types of investors, etc.); and

information on the level of stabilising activity which is being undertaken (though it may not be desirable, for reasons of confidentiality, for this to be disclosed in any detail until the stabilising period has ended).

6.2

The issuer may also request information on the reasons for the exercise of the right to additional allotment by the stabilising manager. In particular, the issuer may wish to know how far the additional allotment is attributable to:

a need to deliver relevant securities to persons who are unconnected with the stabilising manager; and

a need to make good any failures to deliver by other counterparties.

The issuer may also wish to consider whether the additional allotment might have led to a profit for the stabilising manager.

6.3

The stabilising manager is not under any obligation to identify the names of individual clients to the issuer.

01/12/2001

MAR 2 Annex 3

Frequently asked questions on the price stabilising rules

01/12/2004

Application

What does the sentence in MAR 2.1.4 G "Other offers that may be regarded as public are offers to a section of the public, placements that are not essentially private and distributions" mean? If, for example, a public offer of shares is made in another jurisdiction and a private placement of GDRs is made in the United Kingdom, how could that placement of GDRs be "...not essentially private"?

The policy intends to exclude block trades of securities already in issue, not to limit genuine offers for the purposes of capital raising. The guidance given in the MAR 2 sets this out. There is no universally accepted definition of "public offer", nor is it possible or desirable to give exact guidance on how many investors would be required to make an offer "public". It is clear from MAR 2.1.3 R (5) that the public announcement element is critical; stabilisation of placements is only allowed after they are announced. If firms have concerns about a particular issue structure, they may wish to approach us for individual guidance.

The rules state that the stabilisation safe harbour is available for offers of £15 million or more. Are there circumstances when the safe harbour would be available for offers smaller than £15 million? First, if the overallotment option raised the value above £15 million, would stabilisation be permitted? Secondly, if there are two offers of relevant securities, one of which is below £15 million, can they be combined for stabilisation purposes?

MAR 2.1.3 R (4) sets the limit at £15 million, and this replicates the limit under the Financial Services Act 1986. This refers to the amount to be raised and available for offer. MAR 2.1.3 R and MAR 2.4.2 R (1) state that an overallotment relates to securities that are not among those offered and so are not included in the £15 million limit. So the offer itself, distinct from the overallotment option, should indicate the value and the overallotment is clearly not included in this amount.

If there is more than one offer of the same relevant or associated securities they will only be able to be combined for stabilisation purposes (that is, treated as a single offer) if one of the offers is for more than £15 million and if they are issued simultaneously or almost simultaneously. In these circumstances, all of the securities will be able to be supported by price stabilising action , provided that this is undertaken pursuant to the price stabilising rules in the case of all the securities subject to the offer (including all required disclosures). Firms should seek individual guidance on the ability to combine offers that are made almost simultaneously and the applicable stabilising period for each of the offers.

Record keeping: Territorial application

The territorial application at MAR 2.1.6 R (2) is for a firm's business when "carried on from an establishment in the United Kingdom". Under MAR 2.2.4 G the safe harbour is available only if proper records are kept. The record-keeping requirement is a general rule, applicable only to authorised firms. Where does this leave passported firms operating out of, for example, Paris? Do they have to follow the record-keeping rules in MAR 2.7 ?

MAR 2.2.4 G only imposes the record-keeping requirement in MAR 2.3.2 G on those stabilising managers that are obliged to keep those records. MAR 2.3.2 R (3) makes it clear that only those persons to which MAR 2.7 applies have to meet the register requirements in MAR 2.7. The rules in MAR 2.7 (and the rules in MAR 2.6) are general rules made under section 138 of the Act. So, only a firm carrying on business from an establishment in the United Kingdom has to meet the requirements in the rules in MAR 2.6 and MAR 2.7 (see MAR 2.1.6 R (2)). An incoming EEA firm must comply with these rules where this activity is undertaken in the United Kingdom, but if the activity is undertaken in its Home State, local record keeping rules apply. An incoming EEA firm that is carrying on stabilising activity, but only from an establishment abroad, does not have to meet the requirements in MAR 2.7 to get the safe harbour defences referred to in MAR 2.1.2 G (see MAR 2.1.8 G). So MAR 2.2.4 R (2) and MAR 2.3.2 R (3) are not only about whether the person concerned is authorised, but also whether, in the circumstances, the person is obliged to comply with the rule.

Please note that, in this FAQ, when we refer to general rules we are referring to those rules made under section 138 of the Act. The rules in MAR 2.1 to MAR 2.5 are price stabilising rules made under section 144 of the Act (Price stabilising rules).

Stabilising managers and agents

The rules allow a single stabilising manager. How does this approach relate to agents?

There must be one person that has the sole responsibility for ensuring compliance with the United Kingdom price stabilising rules ("the rules"). This person is referred to as the stabilising manager. The stabilising manager can delegate activities to an agent or agents, including agents in other jurisdictions. However, the stabilising manager must still maintain overall responsibility for managing and co-ordinating the stabilisation.
This requirement stems from:
(a) the definition of stabilising manager as "the single person responsible for stabilising action under MAR 2"; and
(b) MAR 2.6.4 R, which requires each bid to be made or transaction effected by the stabilising manager himself or a person appointed on specified terms to act as an agent for the stabilising manager.
However, the rules do not prohibit different managers for different jurisdictions. We are aware, for example, that local stabilising rules in some overseas jurisdictions may require a local manager or that local expertise may be required in meeting those local rules. For an offer in an overseas jurisdiction, there is no requirement for an overseas manager to follow the rules unless he wants to obtain the benefit of the safe harbour defences referred to in MAR 2.1.2 G. In such a case, there must be compliance with MAR 2.1 to MAR 2.5, or with MAR 2.8. Further, if the overseas manager wants to use an agent in the United Kingdom, he should ensure that one person is identified as the stabilising manager for the purposes of the rules. That stabilising manager will take responsibility for compliance with MAR 2.6.4 R, and so will take responsibility for the actions of any agents also undertaking stabilisation in the United Kingdom. If the stabilising manager is a firm (that is, an authorised person ) the agent in the United Kingdom will not be able to benefit from the safe harbour if he makes a bid or effects a transaction during stabilising action unless he is appointed on terms complying with MAR 2.6.4 R. (Note that in this scenario we envisage that the stabilising manager will be a firm or employed by a firm (see MAR 2.6.2 R), but if he is not, we suggest that individual guidance is sought.)

The rules appear to impose a greater responsibility on the stabilising manager for agents' actions than those known to the normal laws of agency. If institutions cover themselves by introducing indemnity statements into contracts, would this mean the policy would be ineffective?

We intend to ensure that responsibilities are clear but avoid setting specific rules in this area. In setting this policy, we envisaged that a contractual arrangement would govern the relationship between principal and agent (explicitly stating the limits of the agent). The contractual relationship between the stabilising manager and his agent could specify that the authority of the agent was limited to actions complying with the rules. However, the contract would also include the term outlined in MAR 2.6.4 R (2)(b). This would make the stabilising manager as responsible to others for the acts or omissions of the agent as if they had been done by the stabilising manager . If the agent were to breach the rules then, even if it is acting outside the authority of the stabilising manager, the stabilising manager would be responsible to others for those actions. However, applying MAR 2.6.4 R means that if the agent does, for example, breach the price limits, the stabilising manager will not automatically lose the safe harbour and be guilty of an offence to which the rules relate. The questions of whether the safe harbour has been lost and whether there has been such an offence, raise different issues. We would need to consider, for example, the steps taken by the stabilising manager in seeking to ensure that the agent did comply with the rules. Our policy here is not defeated by contractual arrangements resulting in the agent indemnifying the stabilising manager.
It is also relevant that MAR 2.6.4 R applies only to a stabilising manager which is a firm (that is, an authorised person ) operating from an establishment in the United Kingdom. If the contract fails to include the required term, there could be disciplinary consequences for the firm, though breach of MAR 2.6.4 R (2)(b) does not result in civil liability in its own right (see MAR 2.1.9 R).

MAR 2.6.5 R prohibits stabilising managers from entering into principal trades in the relevant securities with their agent. Does the FSA mean to prohibit, for example, cases where the manager and the agent act together to short sell as part of ancillary stabilising action, but where the agent is more successful in the selling, and where the stabilising manager then covers the agent's short position? The rule suggests that this cannot now be done. Is this the intention?

There are a number of issues to consider here.
Any stabilising or ancillary action taken by the stabilising manager or his agent must be taken with a view to supporting the market price of the relevant securities (MAR 2.2.3 R and MAR 2.4.2 R). By their nature, pre-arranged transactions between a principal and agent will not usually be taken with this view in mind. When drafting the rule, we wanted to prohibit the situation where, for example, an agent opened a short position to enable his principal to offload a net long position at less of a loss than would otherwise be the case.
In the specific example referred to in the question above, we would not consider the pre-agreed covering of a short position as prohibited behaviour where:
(a) it comes within the permitted range of stabilising action and is taken with a view to supporting the market price of the relevant securities; and
(b) it involves the agent effectively conducting transactions for the principal's book.
The FSA is aware that the application of MAR 2.6.5 R (1) may raise issues for participants in the debt markets. The FSA is currently considering the issue and we anticipate amending this rule in the near future. In the meantime, we suggest that firms approach the FSA for individual guidance or a waiver.
It is also worth remembering that MAR 2.6.5 R is a general rule (see MAR 2.1.8 G). As such, MAR 2.6.5 R is not relevant for the defences outlined in MAR 2.1.2 G, so the transaction itself will not cause a firm to lose the safe harbour.

The price stabilising rules prohibit entering into transactions with agents during the stabilising period ( MAR 2.6.5 R (1) ). For a large firm, it would be difficult to suspend all dealings with agents as they operate on several different levels and have numerous relationships. This would severely limit market activity. Can this be avoided by using Chinese walls?

We introduced this policy to avoid a person manipulating the price through dealings between the principal and its agent. This could arise, for example, if the agent were to sell at a price higher than the price at which another holder of the stock would be able to sell. The thrust of the policy behind the rules is to prevent activities inconsistent with one of the underlying concepts, which is support for the market price. This policy could be defeated if non-arms-length dealing between principal and agent were part of the process.
However, we do not intend that the policy should limit normal market making activities. To separate actions that are collusive from these normal market making activities, it is acceptable to the FSA for a person to use Chinese walls to maintain a separation of its activities as stabilising manager and its activities as market maker. MAR 2.6.5 R (2) states that the prohibition in MAR 2.6.5 R (1) does not apply where the stabilising manager could not have reasonably been expected to know the identity of the counterparty. The use of Chinese walls, to the extent that they will help keep the identity of one party from the other, will in our view enable the market maker to conduct its normal activities with its counterparties. It must be clear, however, that the Chinese wall is operated in line with the normal procedures in COB 2.4.4 R. (This must also be the case for the agent if the agent is an authorised person. This may be more problematic if the agent is a small entity and if there is limited clarity of role in the relationship between the stabilising manager and market maker.)
The firm should ensure that it reviews its actions case by case to ensure that it is not engaging in market abuse and, where necessary, approach the FSA for individual guidance. Where the stabilising manager is limited to using agents that are affiliates of the stabilising manager, it should apply to us for individual guidance on a case by case basis.
Please note that this rule would usually only affect a limited number of transactions. The rules only apply for a limited set of conditions, that is, for dealings in relevant and associated securities during the stabilising period.

Depositary receipts

What is the policy reason for 'uniformity' of depositary receipts ("DRs") as set out in the definitions, especially concerning numerical uniformity?

We introduced the principle of uniformity to prevent stabilising of DRs that are complex products or which are in the form of an index, that is, those that are non-equivalent instruments. The definition of DR in article 80 of the Regulated Activities Order (which is one of the group of securities specified in MAR 2.1.3 R), excludes receipts conferring rights for two or more investments issued by different persons. (There is a further definition in Schedule 2 to the Criminal Justice Act 1993, for the insider dealing provisions, which defines a DR as a certificate or record issued by or on behalf of someone who holds any relevant securities of a particular issue.) Given these definitions, the standard operation of MAR 2.2.3 R is that a DR can, where it is a relevant security (that is, it is issued as part of the offer), be treated as in the definition of the Regulated Activities Order. The rules do not prohibit stabilising DRs of a different size or denomination to the securities they represent. These are still mutually interchangeable and uniform with the underlying security, and fall within the scope of the rules.
However, where a DR is not issued as part of the offer the definition in the Glossary of an associated security (that it is "...in all material respects uniform with the relevant security in terms of value, size and duration") applies. So, where an associated security is to be stabilised, it should not differ from the relevant security to any material extent. In our view, a DR that is a multiple of a relevant security is an associated security because it is still the same size in all material respects, as it is based on a security that is the same size. However, a DR that is a multiple of a security that is not the same size as a relevant security is not an associated security.

Price limits

The pricing limits have a ceiling at the issue price, but MAR 2.4.4 R allows ancillary action (under MAR 2.4.2 R ) which is not subject to the price limits. MAR 2.4.2 R (2) allows for the closing out or liquidation of any position established under MAR 2.4.2 R (1) by buying relevant or associated securities outside of the pricing rules. However, most of this ancillary action is likely in practice to take place in the grey market and most stabilising managers would be expected to obtain a greenshoe. In effect, any further action would be to close out the short, so circumventing the price limits. Is this correct? The only cases where the limits would apply would be in cases where (i) a short has not been established (that is, no overallotment) or (ii) where the short is closed out, but there is a need to stabilise further.

A reminder of this issue was outlined in our Market Watch Newsletter No. 1 (September 2001) on our website at www.fsa.gov.uk/marketconduct. Any short positions opened by a stabilising manager with the purpose of "circumventing" the price limits in MAR 2.5 would take the stabilising manager out of the stabilising action safe harbour. A short position established by short sales or an overallotment must be established "with a view to supporting the price of the relevant securities by action under MAR 2.2.3 R". Action can only be taken under MAR 2.2.3 R if certain conditions are met, including the price limits in MAR 2.5 (see MAR 2.2.2 G (4)). A stabilising manager can only open a short position if it does so with a view to buying relevant securities in line with the price limits in MAR 2.5. In other words, at the time the short position or overallotment position is taken, it must be taken by the stabilising manager with a view to taking action under MAR 2.2.3 R (that is, purchasing securities) in line with the price limit rules.
If, at the time the short position is set up, the real intention is to circumvent the price limits, then that position is not being set up "with a view to supporting the price" of the relevant securities. Instead, the position is being taken with a view to avoiding the price limits.
With shorts created for price support, if it then transpires that it is not possible to cover the position in line with the price limit rules, the stabilising manager is able, without breaching the rules, to cover the position outside the price limits. There will also be economic pressures here given the costs of covering a short. Not applying the price limits to the covering purchases brings the covering of short positions within the safe harbour. So, the issue is: when does buying by a stabilising manager contrary to the price limit rules indicate that the stabilising manager did not take the position with a view to buying in line with the price limits? This would be a question of fact, to be decided in the circumstances of each case. However, an indication might be where the overallotment was so large in relation to the greenshoe facility available that it would make it probable that there might have to be closing out above the price limits.

01/08/2002

MAR 3

Inter-Professional
Conduct

MAR 3.1

Application

01/12/2004

APPLICATION: WHO?

MAR 3.1.1

This chapter applies to every firm except:

(1) a service company, unless the service company is an ATS operator, in which case, MAR 3.4.10 G and MAR 3.4.10A G apply to the service company in relation to the operation of the ATS;

(2) a non-directive friendly society;

(3) a non-directive insurer;

(4) a UCITS qualifier.

01/04/2004

APPLICATION: WHAT?

MAR 3.1.2

This chapter applies to a firm:

(1) when it carries on:

(a) regulated activities; or
(b) related ancillary activities;

(2) to the extent that the regulated activity the firm is carrying on is:

(a) dealing in investments as principal; or
(b) dealing in investments as agent; or
(c) acting as an arranger; or
(d) giving transaction-specific advice;

(3) but only if the activity referred to in (1) and (2) is in or is in respect of an inter-professional investment and is undertaken with or for a market counterparty.

01/12/2001

MAR 3.1.2A

In MAR 3.1.2 R, the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc) is to be disregarded in determining whether dealing in investments as principal (or agreeing to do so) is a regulated activity.

01/05/2003

MAR 3.1.3

This chapter does not apply to the carrying on of the following activities:

(1) the approval by a firm of a financial promotion; or

(2) activities carried on between operators, or between operators and depositories, of the same collective investment scheme (when acting in that capacity); or

(3) corporate finance business;

(4) safeguarding and administering investments and agreeing to carry on that regulated activity; or

(5) concluding a distance contract with a retail customer.

09/10/2004

APPLICATION: WHERE?

MAR 3.1.4

This chapter applies only with respect to a firm's activities carried on from an establishment maintained by the firm in the United Kingdom.

01/12/2001

RIGHTS OF ACTION FOR DAMAGES

MAR 3.1.5

A contravention of the rules in MAR 3 does not give rise to a right of action by a private person under section 150 of the Act (and each of the rules in this instrument is specified under section 150(2) of the Act as a provision giving rise to no such right of action).

20/09/2001

MAR 3.2

Purpose

01/12/2004

MAR 3.2.1

The main objective of this chapter (MAR 3) is the maintenance of confidence in the financial system, although it is also relevant to the FSA's other regulatory objectives under the Act. However, many of its provisions relate to the conduct of bilateral dealings and it seeks to secure good market practice by firms undertaking inter-professional business in three ways:

(1) by increasing certainty by explaining how the Principles apply to inter-professional business, whilst acknowledging that what is required to meet the proper standards of conduct for a firm may differ depending on whether or not the firm is dealing with a market counterparty (see PRIN 1.2.1 G(Characteristics of the client));
(2) by setting out rules for inter-professional business in cases when it is not appropriate to rely on the Principles alone; and
(3) by setting out the FSA's understanding of certain market practices and conventions; drawing this information together in this way will assist certainty, reduce the scope for disputes and make it easier to resolve disputes that do arise.

01/12/2001

MAR 3.3

Contents and status of this chapter

01/12/2004

MAR 3.3.1

MAR 3 Annex 1 G provides guidance on the scope of this chapter.

01/12/2001

MAR 3.3.3

MAR 3 Annex 3 G is a statement of what the FSA understands to be generally regarded as good market practice and conventions in certain areas. It is not guidance on rules.

01/12/2001

MAR 3.4

Standards expected of firms when undertaking inter-professional business

01/12/2004

MAR 3.4.1

This section 3.4 provides guidance on the interpretation of the Principles and in particular Principle 1 (Integrity), Principle 2 (Skill, care and diligence), Principle 5 (Market conduct) and Principle 7 (Communications with clients.)

01/12/2001

MAR 3.4.2

The Principles, as they apply to inter-professional business, will be interpreted on the basis that market counterparties do not need or expect the level of protection provided to private customers or intermediate customers. In many respects, inter-professional dealings are mutually self-disciplining. Market counterparties have commercial sanctions available if they consider the conduct of someone they conduct business with is unacceptable, and are responsible for their own decisions. These factors are relevant also to the FSA's interpretation of the provisions of this chapter.

01/12/2001

SUITABILITY AND ADVICE

MAR 3.4.3

The Principles do not require a firm to assess the suitability of a particular transaction for its client once it has established that it is dealing with a market counterparty. For example, the firm is not obliged to ensure that the market counterparty understands the risks involved; nor is it under any duty to provide best execution or other dealing protections (but see MAR 3.4.5 G to MAR 3.4.9 G).

01/12/2001

MAR 3.4.4

Similarly, a firm is not obliged to give advice to a market counterparty. The mere passing of information does not mean the firm has assumed responsibility for giving advice. Although Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its ''clients", the only requirement of Principle 7 relating to market counterparties is that a firm must communicate information to market counterparties in a way that is not misleading. (See PRIN 3.4.1 R.)

01/12/2001

COMMUNICATION OF INFORMATION

MAR 3.4.5

Principle 7 (Communications with clients) requires that a firm's communications with a marketcounterparty should not be misleading. Otherwise, for the reasons explained in MAR 3.4.4 G, Principle 7 does not apply to a firm's communications with market counterparties.

01/12/2001

MAR 3.4.6

If a firm volunteers information to a market counterparty, but no formal advisory arrangement is agreed, the firm need not advise a market counterparty about the reliability, relevance or importance of that information. Silence on the part of a firm does not result in a breach of Principle 7, unless, in the circumstances, it results in a communication made by a firm being misleading.

01/12/2001

MAR 3.4.7

(1) It is for a firm to decide whether it wishes to provide information to a market counterparty. If it does so the firm is not obliged to keep the market counterparty informed of any changes to the information, unless the firm has agreed to do so.

(2) Because the duties owed by a firm to a market counterparty are limited, it will frequently be the case that there will be no clash between the duties owed by the firm to the market counterparty and the firm's interests. There will in those cases be no requirement on the firm to disclose its interests.

(3) When a firm does owe a duty to a market counterparty that arises under the general law of contract (see as an example MAR 3.4.8 G) it should manage any conflict of interest. This can be achieved by the operation of internal Chinese Walls (in accordance with (Chinese Walls) COB 2.4). Otherwise, before it transacts, the firm should disclose the nature and extent of any material conflict to the market counterparty.

(4) This paragraph, MAR 3.4.7 G, is guidance on Principle 1 (Integrity) and Principle 5 (Market conduct).

01/12/2001

MAR 3.4.8

The following are examples of where there may be responsibilities that potentially give rise to a duty to disclose material conflicts of interest to the market counterparty:

(1) the firm is acting as agent for the market counterparty;

(2) the firm has agreed to advise the market counterparty;

(3) the firm otherwise owes fiduciary duties to the market counterparty.

01/12/2001

MAR 3.4.9

Thus, a firm acting as an arranger for a market counterparty, when the firm is an affiliated company of the other principal, should disclose that relationship to the market counterparty.

01/12/2001

CLARITY OF ROLE

MAR 3.4.10

A firm should take reasonable steps to ensure that it is clear to the market counterparty whether it is acting on its own account, as agent, or as arranger before it enters into a transaction. If a firm is acting as a wholesale market broker, it should indicate what type of broker it is, for example name-passing broker or matched principal broker. This paragraph, MAR 3.4.10 G, is guidance on Principle 7 (Communications with clients).

01/12/2001

MAR 3.4.10A

An ATS operator should take reasonable steps to ensure that the respective roles and responsibilities of the ATS operator and the market counterparty in relation to use of the ATS are clear to the market counterparty.

01/04/2004

MAR 3.4.11

If a firm has agreed with a market counterparty to act in one capacity in a transaction, it should not then act in any other capacity in that transaction without the consent of that market counterparty. For example, if a firm bids to transact on an agency basis, it should not, without consent, execute any part of the trade against its own book.

01/12/2001

MAR 3.4.12

It is not consistent with acting solely as an arranger (or name-passing broker) to take positions, even fleetingly, or act on a matched principal basis in the course of that transaction.

01/12/2001

MARKETING INCENTIVES, INDUCEMENTS AND PAYMENTS IN KIND

MAR 3.4.13

MAR 3.4.14 G and MAR 3.4.16 G provide guidance on the interpretation of the Principles and in particular Principle 1 (Integrity), Principle 3 (Management and control) and Principle 5 (Market conduct) as they apply to marketing incentives, inducements and payments in kind.

01/12/2001

MAR 3.4.14

A firm should take reasonable steps to ensure that it, or any person acting on its behalf, does not offer, give, solicit or accept an inducement if it is likely to conflict to a material extent with any duty which a recipient firm owes to another person. Inducement can include entertainment and soft commissions.

01/12/2001

MAR 3.4.15

If a firm gives an inducement and the recipient, although a market counterparty, is acting on behalf of customers, the firm may be subject to the provisions of COB 2.2 (Inducements and soft commission).

01/12/2001

MAR 3.4.16

A firm should make and implement appropriate systems, controls and policies consistent with MAR 3.4.14 G.

01/12/2001

MAR 3.5

Transactions at Non-Market Prices

01/12/2004

INTRODUCTION

MAR 3.5.1

A firm should not enter into a transaction which it knows to be improper, or which it ought reasonably to have realised is improper, whether on its own account or for a third party. Firms often do not have the information to be able to assess the reasons why a market counterparty is entering into a transaction, but from past experience, a good indication that the purpose may be improper is if the transaction is undertaken at a price other than at the prevailing market price. Failure to use prevailing rates or prices may result in a firm participating, whether deliberately or unknowingly, in the concealment of a profit or loss, or in the perpetration of a fraud. There may, however, be legitimate reasons for entering into transactions at non-market prices, and MAR 3.5.4 R requires that a firm take reasonable steps to check this.

01/12/2001

MAR 3.5.2

Firms acting as arrangers (or name-passing brokers) have a more limited role in the transaction and MAR 3.5.4 R and MAR 3.5.7 E do not apply to them. Under Principle 1 (Integrity) and Principle 5 (Market conduct), a firm acting as arranger (or name-passing broker) should not conclude the arrangement if there is information from which it ought reasonably to conclude that the transaction is improper, whether or not it is at a non-market price. Notwithstanding their limited role, firms acting as arrangers (or name-passing brokers) as well as other firms should also comply with obligations upon them arising from ML.

01/12/2001

MAR 3.5.3

The requirements upon firms when conducting designated investment business with or for a customer are set out in COB 7.15 (Non-market-price transactions).

01/12/2001

NON-MARKET-PRICE TRANSACTIONS

MAR 3.5.4

Except where MAR 3.5.6 R applies, a firm must not enter into, as agent or principal, a non-market-price transaction under which it deals in an inter-professional investment unless it has taken reasonable steps to ascertain that the transaction is not being entered into by the market counterparty for an improper purpose (see also MAR 3.5.7 E).

01/12/2001

MAR 3.5.5

A firm must make and retain, for a period of three years, a record of the steps it has taken under MAR 3.5.4 R, in relation to each transaction.

01/12/2001

MAR 3.5.6

MAR 3.5.4 R does not apply to a non-market-price transaction if it is subject to the rules of an RIE.

01/12/2001

MAR 3.5.7

(1) To take reasonable steps as required by MAR 3.5.4 R a firm should:

(a) have in place procedures to enable it to identify non-market-price transactions (for guidance on this, see MAR 3.5.8 G to MAR 3.5.12 G);

(b) have in place, and approved by an individual holding a senior position with the firm, a policy and procedure for the review (to take place before the firm commits itself to that transaction) of the non-market-price transaction:

(i) by an individual holding a senior position with the firm; or

(ii) in accordance with (2);

and should follow that policy and procedure (for guidance on this, see MAR 3.5.17 G to MAR 3.5.21 G);

(c) ensure the review considers the reasons for the transaction (for guidance on this, see MAR 3.5.13 G to MAR 3.5.16 G); and

(d) check whether it has been put on notice that the transaction is for an improper purpose.

(2) A firm may have the review in (1)(b) carried out by an individual working for the firm who does not hold a senior position in the firm if:

(a) the policy and procedures established under (1) cover such reviews;

(b) that policy sets out the categories of transaction that may be reviewed in this way;

(d) the firm can demonstrate that these categories of transactions are routinely entered into by firms and are so defined that there is a high probability that transactions coming within them will be for proper purposes;

(e) the factors defining those categories do not in substance involve any judgment of whether any purpose is improper;

(f) the policy provides for matters to be referred to a senior level in appropriate circumstances;

(g) those approving the policy are satisfied that all those who are eligible under the policy to participate in the review have the appropriate level of skills;

(h) the policy has due regard to segregation of responsibilities; and

(i) the firm keeps under review whether the categories of transaction established under (2) do have the result described in (2)(d).

(3) Compliance with (1) and, to the degree relevant, (2) may be relied on as tending to show compliance with MAR 3.5.4 R.

(4) Contravention of (1) or, to the degree relevant, (2) may be relied on as tending to show contravention of MAR 3.5.4 R.

01/12/2001

WHETHER A TRANSACTION IS TO BE CONSIDERED A NON-MARKET-PRICE TRANSACTION

MAR 3.5.8

A non-market-price transaction is a transaction where:

(1) the dealing rate or price paid by the firm or its client differs from the prevailing market rate or price to a material extent; or

(2) the firm or its client otherwise gives materially more or less in value than it receives in return.

01/12/2001

MAR 3.5.9

Certain types of transactions or structured transactions are undertaken at non-market rates or prices, but are not necessarily considered to be non-market-price transactions. Examples are:

(1) a transaction with more than one component, where the individual components are entered into at non-market rates or prices, so long as the sum of the whole transaction produces an overall market rate or price, for example:

(a) asset swaps, where the underlying asset is sometimes sold at a non-market price; the fixed cash flows from the asset are then passed back to the seller, also at a non-market rate; where neither the asset trade nor the swap is at a market rate, the overall transaction can be considered to be at the market price where the combination of the two components delivers this result; and

(b) other types of swaps, where one or both legs is not on the forward curve (showing implied forward rates or prices), for example when up-front or final payments are involved;

(2) the purchase and sale of out of the money options. The fact that the strike price is away from the market price is not in itself sufficient to give rise to a non-market-price transaction; other factors, such as the level of premium, must also be considered;

(3) in tax-based transactions, a tax gain or liability should be taken into account in order to determine whether it is a non-market-price transaction.

01/12/2001

MAR 3.5.10

Certain circumstances may result in a transaction being undertaken at a price other than the market price, for example:

(1) the transaction is not for a marketable amount; or

(2) an order has been carried out over a period of time; or

(3) a transaction is executed outside normal market hours; or

(4) a transaction is executed in illiquid markets; or

(5) a transaction has a non-standard settlement period;

and these circumstances may be relevant in assessing whether the transaction constitutes a non-market-price transaction.

01/12/2001

MAR 3.5.11

The question of whether a transaction is a non-market-price transaction is to be judged as at the time it is effected and not with hindsight.

01/12/2001

MAR 3.5.12

The variation or rolling over of an existing transaction should be regarded as a new transaction for the purposes of MAR 3.5.4 R.

01/12/2001

WHETHER A TRANSACTION IS TO BE CONSIDERED TO BE FOR IMPROPER PURPOSES

MAR 3.5.13

Examples of improper purposes for transactions (see MAR 3.5.4 R) include:

(1) the perpetration of a fraud;
(2) the disguising or concealment of the nature of a transaction or of profits, losses or cashflows;
(3) transactions which amount to market abuse;
(4) vulnerable transactions under the Insolvency Act 1986; and
(5) "window dressing", in particular around the year end, to disguise the true financial position of the person concerned.

01/12/2001

MAR 3.5.14

A transaction may be for one or more of the purposes stated in MAR 3.5.13 G yet still not be a non-market-price transaction. MAR 3.5 should not be taken as qualifying in any way obligations on firms, however these arise, regarding these transactions.

01/12/2001

MAR 3.5.15

When a non-marketprice transaction has more than one component, the assessment of whether or not the transaction is improper should be made by reference to the transaction as a whole. Although the judgment is formed with reference to the whole transaction, a firm may conclude that the rationale for one component would cause it to be in breach of MAR 3.5.4 R.

01/12/2001

MAR 3.5.16

A transfer between a firm and its nominee or an intra-group transfer for risk management purposes may not be at a market price, but will often be for proper purposes. Where that is so, the firm may take part in it. However a firm should establish, and act in accordance with, a policy dealing with these transfers, and other intra-group non-market-price transactions, and be able to demonstrate that it has considered the consequences of participating in them.

01/12/2001

PROCEDURES TO BE TAKEN BY A FIRM

MAR 3.5.17

The procedures a firm has in place to identify non-market-price transactions should be appropriate for the types of transaction in question, bearing in mind MAR 3.5.8 G to MAR 3.5.12 G.

01/12/2001

MAR 3.5.18

When a firm proposes to enter into a non-market-price transaction, the personnel considering the transaction should:

(1) consider the justification and rationale of the other parties to the proposed transaction and whether the decision to enter into it was taken by the parties concerned at a senior level, and not by an individual trader or treasurer; and

(2) (if the transaction is approved) be satisfied that all the material terms of the non-market-price transaction (so far as they affect the firm) have been agreed before the transaction is entered into and that they are promptly recorded in accordance with MAR 3.5.7E; material terms are likely to include the amounts each counterparty is to pay and receive and whether any amounts are to be netted against or offset against any amounts due and owing under a separate transaction.

01/12/2001

MAR 3.5.19

The degree of seniority referred to in MAR 3.5.7 E (1)(b) may depend on the nature of the transaction.

01/12/2001

MAR 3.5.20

A firm operating an electronic matching system should consider implementing appropriate systems to identify potential non-market-price transactions. In these circumstances, it may be appropriate for such identification, and appropriate resulting action, to occur after the transaction has taken place.

01/12/2001

MAR 3.5.21

A firm may take reasonable steps to ascertain its market counterparty's rationale for entering into the transaction, as set out in MAR 3.5.18 G, but still be unable to find this out. It is up to the firm, having regard to the circumstances, to decide whether it is appropriate to enter into the transaction. One relevant circumstance is whether or not the market counterparty is another firm, in which case the firm is entitled to assume that the other firm is acting properly, in the absence of any further information to the contrary.

01/12/2001

MAR 3.6

Taping

01/12/2004

MAR 3.6.1

(1) This section MAR 3.6 provides guidance on the interpretation of the Principles, and in particular Principle 3 (Management and control), as they apply to the capture of certain transactional information and other matters. MAR 3.6 applies only to inter-professional business and there are other requirements in the Handbook which relate to record-keeping requirements.

(2) MAR 3.6 also provides additional guidance on the record-keeping requirements of SYSC 3.2.20 R(Records).

01/12/2001

MAR 3.6.2

MAR 3.6 does not apply:

(1) to a firm acting in the course of carrying on the regulated activity of establishing, operating or windingupa collective investment scheme; or

(2) to an insurer; or

(3) in respect of a transaction if the firm is subject to record-keeping requirements in COB for that transaction.

01/12/2001

MAR 3.6.3

A firm should implement appropriate systems and controls with a view to ensuring that the material terms of all transactions to which it is a party, and other material information about such transactions, are promptly and accurately recorded in its books or records. The manner in which this information may be recorded include:

(1) voice recordings of transactions;

(2) voice recordings of oral confirmations;

(3) written trading logs or blotters; and

(4) automated electronic records.

01/12/2001

MAR 3.6.4

A firm acting as an arranger (or name-passing broker) need record only those terms that are necessary for the transaction to be identified in its records or that are otherwise relevant to its role as arranger (or name passing broker). For example, it would not normally know the payment and settlement instructions.

01/12/2001

MAR 3.6.5

A firm should be able to access all records as promptly as necessary. Records should be kept in comprehensible form or should be capable of being promptly so reproduced. The firm should make and implement appropriate procedures to avoid unauthorised alteration of its records.

01/12/2001

MAR 3.6.6

If the records identified in MAR 3.6.3 G are substituted by written or electronic confirmations produced in accordance with SYSC 3.2.20 R (Records), then that confirmation may be an adequate record of the transaction.

01/12/2001

MAR 3.6.7

If a transaction is agreed or arranged through an electronic trading, matching and order-routing system, then the records provided by that system may be an adequate record of the transaction.

01/12/2001

MAR 3.6.8

A firm should keep under review whether, and to what extent, to make and retain voice recordings of its front and back office telephone lines used for negotiating, agreeing, arranging and confirming transactions and for the passing of payment instructions. (See also MAR 3.6.10 G.)

01/12/2001

MAR 3.6.9

If a firm undertakes oral confirmations of the transactions it executes or brings about, voice recordings of these conversations can constitute an adequate record of that confirmation.

01/12/2001

MAR 3.6.10

In undertaking a review under MAR 3.6.8 G, it is likely to be a relevant factor that voice recordings:

(1) provide an immediate record of all transactions and therefore may assist firms in resolving any disputes;

(2) may assist a firm to identify whether any personnel of the firm or of its market counterparty are involved in inappropriate behaviour; market counterparties may take comfort in knowing that their transactions are immediately recorded and that this provides evidence that can be relied upon; and

(3) can provide evidence of the rationale for a particular trading strategy or other aspects of inter-professional business and thereby provide protection to the firm.

01/12/2001

MAR 3.6.11

A firm should make and implement policies on the length of time it keeps tapes. The FSA does not expect tapes to be kept for the full period required by the general record-keeping requirement, except where a firm relies upon voice recordings to comply with record-keeping requirements, in which case it should retain those recordings in accordance with the relevant requirements. One factor in setting that policy may be the use of tapes to assist the firm in resolving any disputes with market counterparties.

01/12/2001

MAR 3.7

Firms acting as Wholesale market brokers and those undertaking transactions through them; provisions concerning brokers and arrangers generally

01/12/2004

MAR 3.7.1

MAR 3.7 provides guidance on the interpretation of the Principles, and in particular Principle 5 (Market conduct), as they apply to certain responsibilities of firms acting as wholesale market brokers and of persons undertaking transactions through them. In particular, it covers the passing of names and differences.

01/12/2001

MAR 3.7.2

The use of various terms for brokers and arrangers are based on the understanding that name-passing brokers are, in simple terms, what arrangers are called in certain wholesale markets. As such, the terms are virtually interchangeable and in MAR both terms have generally been used for the avoidance of doubt. Similarly, name-passing brokers and "matched principal brokers" are both subsets of wholesale market brokers. The use of the latter term is intended to reduce confusion.

01/12/2001

PASSING OF NAMES

MAR 3.7.3

A firm acting as a name-passing broker should not prematurely divulge the names of the prospective counterparties to each other, for example before both sides display a serious intention to transact. However, as soon as the material terms of a transaction have been agreed, a firm acting as a name-passing broker should aim to achieve a mutual and immediate exchange of names. When a market counterparty name is unacceptable to another, it is quite proper for a firm acting as a name-passing broker not to divulge by whom the name was refused.

01/12/2001

SETTLEMENT OF DIFFERENCES

MAR 3.7.4

MAR 3.7.5 R to MAR 3.7.8 G apply:

(1) to a firm when it acts as a name-passing broker; and

(2) to a firm whether acting as principal or agent, when its transaction is brought about by a firm acting as a name-passing broker.

01/12/2001

MAR 3.7.5

(1) If a firm acting as a name-passing broker compensates a market counterparty for a difference, that difference must be settled in money (which for these purposes includes payment by discounting, reducing or rebating commission).

(2) A "difference" means (in MAR 3.7.5 R to MAR 3.7.8 G) any difference between a rate or price quoted by a firm acting as a name-passing broker and the rate or price at which the transaction is ultimately concluded.

01/12/2001

MAR 3.7.6

When arranging a transaction, a name-passing broker is trying to achieve a mutual and immediate exchange of names, based on firm quotation of prices. Inevitably, for non-electronic arrangers, there will be occasions when the transaction is not completed at the original price (for instance because a firm price has been hit by another counterparty). The name-passing broker is said to have missed the original price when a market counterparty accepts a firm quote at that price, but the name-passing broker is unable to arrange for the deal to be completed at that price.

01/12/2001

MAR 3.7.7

A firm acting as a name-passing broker should not ordinarily accept liability for differences and should provide its services on the basis that it does not do so. (This is because accepting liability for differences amounts to taking a position legally and economically, and the name-passing broker would not be following MAR 3.4.12 G.) A firm doing business with a name-passing broker should not, in the ordinary course, ask the latter for compensation for differences. However, once a difference has arisen, a firm acting as a name-passing broker may offer to compensate its market counterparty for some or all of the difference to preserve the relationship with the market counterparty concerned or for other legitimate commercial reasons. That compensation should be in accordance with MAR 3.7.5 R.

01/12/2001

MAR 3.7.8

When a price has been missed, a firm acting as principal or agent should generally complete the transaction at the next available price through the name-passing broker that has missed the original price. To do otherwise can be prejudicial to the smooth operation of the markets. If the firm does not proceed with the transaction, it should first consider whether withdrawing would be likely to affect the market concerned, and should immediately communicate its decision to the name-passing broker. The firm should not decline to enter into the transaction at the new price if it would breach a reasonable expectation on the part of the name-passing broker that it would not do this.

01/12/2001

GENERAL PROVISIONS ON WHOLESALE MARKETBROKERS AND ARRANGERS

MAR 3.7.9

Any payment for broking or arranging services rendered by a firm, other than on a matched principal basis, should be in money (which for these purposes includes payment by discounting, reducing or rebating commission) unless otherwise agreed in writing between the parties.

01/12/2001

MAR 3.7.10

A firm acting as a wholesale market broker or arranger should not unfairly favour one market counterparty client over another. Treatment that would otherwise have been unfair is not unfair if the market counterparty concerned has expressly consented to it. The "client" of a wholesale market broker or arranger means (in MAR 3.7.10 G and MAR 3.7.11 G) a person for whom it is providing its services as wholesale market broker or arranger.

01/12/2001

MAR 3.7.11

A firm should not place an order with a firm acting as a wholesale market broker or arranger if the main purpose is to ascertain either the identity of any client of that firm, or information about transactions into which that client may be interested in entering. For example, a firm that wishes to purchase 1000 bonds should not have a firm arrange for the purchase of 100, in order to discover the identity of a person willing to sell those bonds, and then transact with that other person direct for the other 900.

01/12/2001

MAR 3.8

Codes of Practice

01/12/2004

MAR 3.8.1

The FSA does not endorse individual codes of practice applying to inter-professional business (except for the Takeover Code) that are in place in some markets. It will, however, take into account the differing standards and practices operating in markets when interpreting the Principles as they apply to inter-professional business. Further, non-compliance with those codes, or of the Non-Investment Products Code in respect of certain non-authorisable activities, may raise issues such as the integrity or competence of a firm which are relevant to the threshold conditions (see COND 2.5.6 G (4)).

01/12/2001

MAR 3 Annex 1

Guidance relevant to MAR 3

01/12/2004

This chapter, MAR 3, applies to firms in their dealings with market counterparties, as set out in MAR 3.1.2 R. When market counterparties have opted to be treated as intermediate customers under COB 4.1.7 R (Classification of another firm or an overseas financial services institution), this chapter does not apply. The requirements on firms in such circumstances are those set out in COB. MAR 3 does, however, apply to firms in their dealings with intermediate customers who have opted to be treated as market counterparties under COB 4.1.12 R (Large intermediate customer described as a market counterparty).

This chapter sets out the requirements upon firms in their dealings with market counterparties. The way a firm is assessed under COB 4.1 (Client classification) has no bearing on its obligations to assess its own clients.

The list of activities in MAR 3.1.2 R (Application: What?) is not based on types of permission. It is based on the activities of dealing, arranging and advice on investments. This means, for example, that a firm may be subject to MAR 3 if it purchases securities in the course of:

(1) operating a collective investment scheme; or

(2) acting as a life insurance company; or

(3) acting as agent for a customer;

in making that purchase This is notwithstanding that the operation of a collective investment scheme, acting as a life insurance company and acting as agent for a customer for a private customer are not activities that are covered by this chapter in their own right.

MAR 3 does not affect the application provisions of the Principles (see PRIN 3 (Rules about application)). The purpose of the application provisions of MAR 3, as they apply to the guidance on the Principles, is to explain in what situations MAR 3 may be used as guidance for interpreting the Principles. If MAR 3 is silent about how the Principles apply to a particular situation, the Principles still apply.

Principles. It is not, in general, specifically tailored for particular types of business, nor is it a comprehensive statement of how the Principles apply to inter-professional business in all situations. The guidance on the Principles in MAR 3 should be read in the light of other requirements that may be applicable in a particular case. For example, this guidance applies to on-exchange business, and does not take into account specific rules of exchanges.

The application provisions in MAR 3.1.2 R (Application: What?) mean that corporate finance business will normally be outside the scope of this chapter. However, firms should note that some activities, such as dealing, carried out in connection with corporate finance business, may be subject to this chapter.

This chapter does not apply to the approval by firms of a financial promotion (see MAR 3.1.3 R); rules and guidance relating to financial promotions are in COB 3. Most financial promotions by unauthorised persons to a market counterparty are exempt under the Financial Promotion Order, (for example, article 19 (investment professionals)) so approval should not be required. In addition, the application of COB 3 to approval of a financial promotion for communication to a market counterparty is limited (see COB 3.2.4 R (2) and COB 3.2.5 R(1) (Exemptions)).

The same transaction may give rise to obligations under this chapter and another sourcebook, such as COB. For example, if a firm purchases an inter-professional investment from a market counterparty on behalf of a customer, this chapter applies to the relationship between the firm and the market counterparty. COB governs the relationship between the firm and the customer.

In some cases, a deal carried out abroad by the firm's overseas branch or by another member of the firm's group may be subject to this chapter if the final booking is to the firm's balance sheet in the United Kingdom. In all cases, the question is whether the activity involves a firm carrying on inter-professional business from an establishment maintained by the firm in the United Kingdom. For the purposes of this discussion, booking does not include doing a deal with a counterparty and transferring it to the United Kingdom balance sheet by an intra-group back-to-back transaction. It is about putting the transaction with the market counterparty directly onto the UK balance sheet.

(1) In some cases, the transaction involves the firm and an overseas affiliate. The overseas affiliate negotiates and arranges the deal with the market counterparty abroad. However, the actual contract is between the firm in the United Kingdom and the market counterparty. It is likely that this chapter will apply to the firm. This is because the firm's entry into the contract amounts to dealing and that dealing is done from an establishment maintained by the firm in the United Kingdom.

(2) If the booking is merely an internal accounting exercise, and the transaction has no other United Kingdom connection, it is likely that this chapter will not apply. For example, the transaction may be negotiated and executed by an overseas branch of the firm but booked to the firm's United Kingdom balance sheet. If the booking to the United Kingdom balance sheet is the only involvement of the firm in the United Kingdom, it is likely that this chapter will not apply to the firm. This is because, even though the firm is party to the contract and is carrying out a dealing transaction, all the dealing activity takes place at the foreign branch. A mere bookkeeping entry in the United Kingdom, not involving the counterparty in any way, does not mean that the dealing activity is carried on from an establishment maintained by the firm in the United Kingdom. It is carried on from the overseas branch.

The territorial application of this chapter does not modify those of any other part of the Handbook. In particular, firms should note the application of Principle 5 (Market conduct), which applies to activities which have, or might reasonably be regarded as likely to have, a negative effect on confidence in the financial system, wherever they are carried on (see PRIN 3.3.1 R).

Nothing in this chapter:

(1) modifies any duty owed by a firm to a private customer or intermediate customer under the provisions of any other part of the Handbook; or

(2) relieves a firm of any other obligation to which it may be subject under the general law; or

(3) should be read as qualifying or modifying the Code of Market Conduct, the Code of Practice for Approved Person or the Statement of Principle.

01/12/2001

MAR 3 Annex 2

Principles and key COB provisions

01/12/2004

Rule

Description

Principle 1

A firm must conduct its business with integrity.

Principle 2

A firm must conduct its business with due skill, care and diligence.

Principle 3

A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

Principle 4

A firm must maintain adequate financial resources.

Principle 5

A firm must observe proper standards of market conduct.

Principle 7

A firm must ... communicate information [to its clients] in a way which is ... not misleading.

Principle 10

A firm must arrange adequate protection for clients' assets when it is responsible for them.

Principle 11

A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.

COB 3

Financial promotion (relating to the approval of a financial promotion, see paragraph 7 in MAR 3 Annex 1 G)

COB 2.4

Chinese Walls

COB 4.1

Client classification

COB 7.13

Personal Account Dealing

CASS

Client assets

01/12/2001

MAR 3 Annex 3

Good market practice and conventions

01/12/2004

INTRODUCTION

This annex, MAR 3 Annex 3, is a statement of what the FSA understands to be generally regarded as good market practice and conventions in certain areas. It is not guidance on rules and is issued under section 157(1)(d) of the Act . This annex applies to all kinds of inter-professional business. It will be evident that much of the content is equally applicable to market counterparties as well as firms.

CONFIDENTIALITY

When information is received from a market counterparty under conditions of confidentiality, that confidentiality is likely to be enforceable by the owner of that information. Confidentiality should be respected, subject to regulatory and legal requirements.

Firms are reminded that the use of loudspeakers in broking and dealing rooms in close proximity to other lines of communication could result in breaches of confidentiality.

NEGOTIATION OF TRANSACTIONS

It is good practice for a firm to agree expressly all the economic terms of a transaction before it commits itself to the transaction. A firm should negotiate the remaining terms in good faith and try to agree them as soon as possible.

It is good practice for a firm to regard itself as bound to transact once the rate or price and any other key commercial terms have been agreed (whether orally or in written form), unless the parties explicitly and unambiguously agree to the contrary.

Generally, a firm that regularly uses the services of a firm acting as a name-passing broker should indicate to it the market counterparties with which, and the investments in which, it is not prepared to transact. That indication should not be in a form which would damage or lower the standing or reputation of the market counterparty in the estimation of reasonable market counterparties if they knew of it. A firm which is given an indication should treat it as confidential.

FIRMNESS OF QUOTATION

It is good practice for a firm to follow market conventions regarding quotation, unless it has specifically agreed otherwise with its market counterparty in advance. It should be clear to a market counterparty ;

(1) whether the quote is firm or not;

(2) whether the quote is subject to any conditions, and, if it is, what they are;

(3) for how long the quote remains firm (in fast moving markets, when practicable); and

(4) whether the quote is firm only for the normal marketable amount (if appropriate, otherwise the firm should state the size of the quote).

Express clarification of these matters is not necessary to the extent that the firm quotes in accordance with the relevant market convention or exchange rules (if applicable).

When a firm quotes to a market counterparty a firm rate or price (whether through an arranger, or name-passing broker , or directly), it is not good practice for the firm then to withdraw that quote or, if that quote is accepted during the period for which the quote remains firm, to decline to deal at that rate or price. A firm may decline to deal with a market counterparty in these circumstances if it was unaware of its identity when the firm gave the quote and the name turns out to be unacceptable, for example, on the grounds of credit risk.

LIMIT ORDERS

Before a firm accepts any limit order from a market counterparty, it is good practice to have made and implemented appropriate:

(1) policies on these orders and in particular the circumstances in which and the terms on which it will accept these orders; and

(2) systems and controls for carrying them out.

A limit order means a stop loss order and any other instruction from a market counterparty to execute transactions if rates or prices reach specified levels. These orders may be time limited or may be for an indefinite period.

OUT OF HOURS/OFFICE DEALING

It is good practice for firms to issue guidelines to their staff on transactions entered into after normal hours or from outside premises, either by mobile phone or any other equipment. The guidelines should cover:

(1) the type of transactions which may be undertaken in this way;

(2) where and with whom these transactions may be executed;

(3) permitted limits;

(4) how and when these transactions should be booked into and recorded on the front and back office systems; and

(5) how and when these transactions are to be confirmed.

When answering machines are used for instant reporting and recording of all off-premises transactions, they should be installed and located in such a way that reported transactions cannot subsequently be erased without senior management approval.

The use of mobile phones for business purposes from within the dealing room, except in an emergency, is considered bad practice.

SETTLEMENT ERRORS

If a firm becomes aware of a settlement error that benefits it at the cost of a market counterparty , it is good practice to inform the market counterparty promptly and reverse the error.

If a firm , acting as a broker , becomes aware that it is holding assets on behalf of a market counterparty because of a settlement error which adversely affects that market counterparty , it is good practice to inform the market counterparty promptly and try to rectify the situation.

CONFIRMATIONS

Confirmations provide a useful safeguard against dealing errors and can be a valuable element in the control of the firms inter-professional business and exposures. It is good practice for a firm to make available to, or provide to, the market counterparty written confirmation of the material terms of a transaction between them, as soon as possible after the transaction has been agreed or executed.

It is acceptable market practice for the firm to agree with its market counterparty that only one party need send a confirmation. If a firm undertakes this practice to a material extent, it is advisable to identify the legal and other risks involved and address them in the firm's risk control policies.

If there is a standard form of confirmation that applies to a transaction a firm enters into, it is good practice to ensure that that form is used, unless there is good reason not to. One example of when there is an applicable standard form confirmation is when the parties enter into the transaction under the terms of a master agreement that provides for an applicable form of confirmation. Another is when it is customary in the market concerned to use a particular form of confirmation for transactions of that kind.

In general, it is not good practice for confirmations to be issued by or sent to the individual dealer responsible for the transaction. It is good practice to ensure that the dealer concerned is not responsible for checking confirmations unless there are exceptional circumstances. If the dealer is given that responsibility, it is good practice to subject the process to independent monitoring.

In general, it is good practice for a firm which arranges a transaction to try to ensure that the parties agree who is to issue a confirmation.

Some transactions are matched through an electronic matching system that does not provide for the issue of confirmations, but instead makes and retains records of transactions itself. In these cases, it may be appropriate for a firm neither to receive nor issue confirmations, provided the system allows for the back offices of users to verify the details of transactions entered into on the system.

The statements of good practice in paragraphs 17 to 22 do not apply to on-exchange business.

STANDARD SETTLEMENT INSTRUCTIONS

It is good practice for a firm to make and implement appropriate policies on the use of standard settlement instructions (SSIs) to reduce the incidence and size of differences arising from a mistaken settlement of funds. These are especially appropriate when the firm has a relationship with a market counterparty which suggests there will be regular payment of significant amounts.

It is good practice to establish SSIs in a secure and verifiable format. A firm acting as an arranger (or name-passing broker) has no responsibility for ensuring that its market counterparty have SSIs in place.

MASTER AGREEMENTS

Firms are encouraged to negotiate and execute master agreements. These govern the relationship between the parties and how such a relationship and all transactions under it shall be terminated in the event of one party's default upon a transaction. It is recognised that executed documentation can be and should be used as an efficient risk management tool. Firms should consider the benefits of valid close out netting provisions (see IPRU).

If it is the policy of a firm to use master agreements, it is good practice to make and implement policies for what transactions should be subject to the terms of which master agreement and have systems and controls for ensuring compliance with that policy. If a firm has a policy that transactions should be entered into with a market counterparty only after a master agreement has been implemented, it is advisable to have procedures to ensure that any exceptions are agreed at an appropriate level.

COMMISSION/BROKERAGE

It is good practice for firms acting as principals to pay due brokerage bills promptly. Overdue payments can seriously disadvantage wholesale market brokers, since overdue payments result, in their treatment by the FSA for regulatory purposes, as an increase in their cost of capital.

DISPUTES

In the event of a dispute between a firm and a market counterparty, it is preferable for the parties to seek to resolve the issues themselves. If they cannot reach agreement, they should consider the advantages of using established arbitration or mediation services.

01/06/2003

MAR 4

Endorsement of the Takeover Code

MAR 4.1

APPLICATION AND PURPOSE

01/12/2004

Application

MAR 4.1.1

This chapter applies to every firm whose permission includes, or ought to include, any designated investment business, except as set out in MAR 4.4.1 R.

20/09/2001

MAR 4.1.2

MAR 4.1.1 R applies regardless of whether the firm's activity:

(1) is a regulated activity;

(2) is carried on from an office of the firm in the United Kingdom; or

(3) is in respect of a client in the United Kingdom.

20/09/2001

Purpose

MAR 4.1.3

The Takeover Code and the SARs provide valuable regulation in the areas of takeovers, mergers and substantial acquisition of shares of companies. The purpose of endorsing the Takeover Code and the SARs is to provide them with statutory support. The other requirements in this chapter provide further support for the functions of the Takeover Panel.

20/09/2001

MAR 4.1.4

Endorsing the Takeover Code and the SARs and imposing the other requirements in this chapter furthers the FSA's regulatory objectives, and in particular the objectives of market confidence and protection of consumers.

20/09/2001

MAR 4.2

ENDORSEMENT

01/12/2004

MAR 4.2.1

The FSA endorses:

(1) the Takeover Code; and

(2) the SARs;

as respects the firms described in MAR 4.1.1 R.

20/09/2001

MAR 4.2.2

The FSA's endorsement in MAR 4.2.1R has effect in relation to the Takeover Code and the SARs as amended from time to time. This is because the FSA has notified the Takeover Panel that it is satisfied with the Takeover Panel's consultation procedures, and not withdrawn that notification, in accordance with section 143(6) of the Act (Endorsement of codes etc.).

20/09/2001

MAR 4.2.3

The effect of the FSA's endorsement in MAR 4.2.1R is that, under section 143 of the Act (Endorsement of codes etc.):

(1) at the request of the Takeover Panel, the FSA may take enforcement action against a firm which contravenes the Takeover Code or the SARs, under Part IV (Permission to Carry on Regulated Activities), Part XIII (Incoming firms: Intervention by Authority), Part XIV (Disciplinary Measures) and Part XXV (Injunctions and Restitution) of the Act (see ENF 14.10); and

(2) at the request of the Takeover Panel, the FSA may take enforcement action against an approved person under section 66(2)(b) of the Act (Disciplinary powers).

20/09/2001

MAR 4.2.4

A failure to comply with a requirement imposed, or ruling given, by the Takeover Panel under the Takeover Code or the SARs has the same effect as a contravention of the Takeover Code or the SARs, under section 143(5) of the Act (Endorsement of codes etc.).

20/09/2001

MAR 4.2.5

ENF 14.10 contains guidance on the FSA's exercise of its enforcement powers in this area.

20/09/2001

MAR 4.3

FURTHER SUPPORT OF THE TAKEOVER PANEL'S FUNCTIONS

01/12/2004

MAR 4.3.1

A firm must not act, or continue to act, for any person in connection with a transaction to which the Takeover Code or the SARs apply (including a rule 8 transaction ) if the firm has reasonable grounds for believing that the person in question, or his principal, is not complying or is not likely to comply with the Takeover Code or the SARs.

20/09/2001

MAR 4.3.2

(1) The Takeover Panel publishes notices regarding compliance with the Takeover Code and SARs. It may also, from time to time, name in those notices persons as persons that, in the Takeover Panel's opinion, are not likely to comply with the Takeover Code or the SARs. Any notices of this type will be available on the Takeover Panel's website (www.thetakeoverpanel.org.uk).

(2) A firm should keep itself informed of Takeover Panel notices and take them into account in seeking to comply with MAR 4.3.1 R. If the Takeover Panel were to name such a person in such a notice, the FSA would expect a firm to comply with MAR 4.3.1 R by not acting or continuing to act for that person.

(3) The FSA would not regard a firm as in breach of MAR 4.3.1 R where the Takeover Panel has indicated that it is content for the firm to act in relation to that transaction.

20/09/2001

MAR 4.3.3

(1) Where a restriction under MAR 4.3.1 R applies, among other things the firm is prevented from carrying on any designated investment business activity, or communicating or approving any financial promotion, in connection with a transaction to which the Takeover Codeor the SARsapplies.

(2) Where a restriction under MAR 4.3.1 R applies, the firm is not prevented from carrying on other activities (including regulated activities) in relation to that person. This includes designated investment business activity which is not in connection with a transaction to which the Takeover Codeor the SARsapplies.

20/09/2001

MAR 4.3.4

(1) Where a restriction under MAR 4.3.1 R applies, an authorised professional firm is not prevented from providing professional advice or representation in any proceedings to the person where that falls within section 327(8) of the Act. This means that the person can obtain legal advice or representation in any proceedings from a law firm and accounting advice from an accounting firm: see MAR 4.4.1 R (2).

(2) While the FSA recognises the duty of authorised professional firms to act in the best interests of their clients, the duty cannot override the provisions of the Takeover Codeor SARsso as to require the authorised professional firm to provide services in breach of, or enable breach of, the Takeover Code or SARs.

20/09/2001

MAR 4.3.5

A firm must provide to the Takeover Panel:

(1) any information and documents in its possession or under its control which the Takeover Panel requests to enable the Takeover Panel to perform its functions; and

(2) such assistance as the Takeover Panel requests and as the firm is reasonably able to provide to enable the Takeover Panel to perform its functions.

20/09/2001

MAR 4.3.6

In MAR 4.3.5 R, "documents" includes information recorded in any form and, in relation to information recorded otherwise than in legible form, references to providing documents include references to producing a copy of the information in legible form.

20/09/2001

MAR 4.3.7

As a result of section 413 of the Act (Limitation on powers to require documents), MAR 4.3.5 R does not require a firm or an authorised professional firm to produce, disclose or permit the inspection of protected items.

20/09/2001

MAR 4.4

EXCEPTIONS

01/12/2004

MAR 4.4.1

This chapter is subject to the following exceptions:

(1) this chapter does not require an authorised professional firm to contravene any rule or principle of, or requirement of a published guidance note relating to, professional conduct applying generally to members of the profession regulated by its designated professional body;

(2) this chapter does not prevent an authorised professional firm from providing professional advice, that is, in accordance with section 327(8) of the Act, advice:

(a) which does not constitute carrying on a regulated activity; and

(b) the provision of which is supervised and regulated by a designated professional body;

(3) this chapter does not have effect in relation to an authorised professional firm in respect of non-mainstream regulated activity; and

(4) this chapter does not apply to:

(a) a UCITS qualifier; or

(b) an incoming EEA firm which has permission only for cross border services and which does not carry on regulated activities in the United Kingdom.

20/09/2001

MAR 5

Alternative Trading Systems

MAR 5.1

Application and purpose

01/12/2004

MAR 5.1.1

This chapter is relevant to every firm that has, or intends to apply for, a Part IV permission and that:

(1) if it is a UK domestic firm, operates or proposes to operate an ATS from an establishment in the United Kingdom or elsewhere;

(2) if it is an overseas firm, operates or proposes to operate an ATS from an establishment in the United Kingdom.

01/12/2004

MAR 5.1.2

This chapter is subject to the provisions in ECO. For example, this chapter is not relevant to an incoming ECA provider acting as such.

01/12/2004

Purpose

MAR 5.1.3

The purpose of this chapter is to provide a framework for implementing several of the CESR ATS standards. The FSA considers that the implementation of these standards will protect consumers, promote market confidence, reduce financial crime and promote public understanding of the financial system. These standards, and therefore this chapter, do not apply to bilateral systems, which are excluded from the definition of an ATS.

01/12/2004

MAR 5.2

Guidance about what constitutes an ATS

01/12/2004

MAR 5.2.1

MAR 5.2.2 G to MAR 5.2.8 G set out guidance on the meaning of the expressions ATS and bilateral system (as defined in the Glossary). This guidance is adapted from the guidance contained in the CESR ATS standards on the meaning of "qualifying system" (which is the term equivalent to ATS used in those standards).

01/12/2004

"System"

MAR 5.2.2

For the purposes of the definitions of an ATS and a bilateral system, a system is intended to include not only the electronic parts (if any) of a system but also any rules, protocols, procedures and agreements that make up the system. It is also intended to cover the various parts of a system whether provided directly by the ATS operator or by another person under an arrangement with the ATS operator.

01/12/2004

"Price taking systems"

MAR 5.2.3

A system may be an ATS although it does not directly involve price formation. For example, a price taking system such as certain crossing systems may be an ATS.

01/12/2004

"Buying and selling interests"

MAR 5.2.4

The expression buying and selling interests is intended to include not only orders, but also quotes and indications of interest.

01/12/2004

"Brings together"

MAR 5.2.5

Buying and selling interests will be regarded as being brought together in the system if they are brought together under the system's rules or by means of the system's protocols or internal operating procedures. The concept of bringing together is intended to cover any process under which interests interact; this may be by automatic matching, by way of selection of interests by users themselves or otherwise. It is not necessary that the interests be displayed to users. The fact that, after interests are matched, the users must ratify a proposed transaction does not mean that the interests are not brought together in the system. However, systems such as order routing systems where interests are transmitted but do not interact are not intended to be covered by the definition of an ATS.

01/12/2004

"Non-discretionary rules"

MAR 5.2.6

The reference to non-discretionary rules in the definition of an ATS is intended to exclude systems where the operator exercises discretion as to how the interests interact. However, the reference is not intended to exclude a system just because the operator has discretion as to whether or not to enter an interest into the system. It is also not intended to exclude a system just because users have discretion about whether or not to take up or accept any expression of interest.

01/12/2004

Bulletin boards etc.

MAR 5.2.7

A bulletin board or similar system where users contact each other outside the system (that is, not under the system's rules and not by means of the system's protocols or internal operating procedures) to negotiate the material terms of transactions will not be covered by the definition of an ATS.

01/12/2004

Bilateral system/central counterparty

MAR 5.2.8

The definition of an ATS excludes bilateral systems. The definition of bilateral system is intended to capture a system that is like an ATS except that a single person enters into one side of every transaction effected using the system. It is not however intended to cover central counterparty systems, where in substance participants deal among themselves but where their deals are assumed by the central counterparty as buyer and seller. A central counterparty will have a flat book unless there is a default or mistake, while typically the counterparty in a bilateral system will take principal positions in investments on a continuous basis. The definition of bilateral system is slightly flexible in that occasional crossings of client orders will not of itself make the system an ATS. It also includes a system where, rather than a single person, one of a number of persons in the same group enters into one side of every transaction effected using the system.

01/12/2004

MAR 5.3

Notification of establishment of an ATS

01/12/2004

Application for permission

MAR 5.3.1

A person who applies for a Part IV permission and proposes to operate an ATS will be required to complete appropriate parts of the application pack relating to the operation of an ATS(see AUTH 3.9 (Procedures in relation to applications for Part IV permission)).

01/12/2004

Variation of permission to operate an ATS

MAR 5.3.2

If a firm that proposes to operate an ATS applies for variation of Part IV permission to carry on an additional regulated activity necessary to operate the ATS, the FSA considers that, for the purposes of SUP 6.3.20 G (Applications involving significant changes), the proposal will usually cause a significant change to the firm's business or risk profile. The FSA may therefore require the firm to complete the appropriate parts of the full application pack (see AUTH 3.9), as directed by the FSA.

01/12/2004

Notice by firm that already has permission to operate an ATS

MAR 5.3.3

If a firm that proposes to operate an ATS already has permission to carry on the regulated activity necessary to operate the ATS, the firm should give notice of the proposal to the FSA before it begins to operate the ATS, in accordance with Principle 11 (Relations with regulators). This is because the FSA considers that this is a business expansion that could have a significant impact on the firm's risk profile or resources (see SUP 15.3.8 G). When the FSA receives notice, it may request further information from the firm such as the completion of a systems form.

01/12/2004

Notification of significant changes to ATS

MAR 5.3.4

The FSA would also expect an ATS operator to give the FSA notice if there is any significant change to the operation of an ATS that it operates, in accordance with Principle 11 (Relations with regulators). Notice should be given as soon as reasonably practicable after the change.

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MAR 5.4

Requirements to be imposed on the Part IV permission of an ATS operator

01/12/2004

MAR 5.4.1

The FSA proposes to implement several of the CESR ATS standards by imposing requirements on the Part IV permissions of ATS operators.

01/12/2004

MAR 5.4.2

The FSA proposes to impose the requirements on the Part IV permissions of ATS operators in a way that has regard to the principle in the CESR ATS standards that the standards should be implemented in a differentiated way, taking into account the particular risk to be addressed and each ATS's circumstances.

01/12/2004

MAR 5.4.3

If a person who proposes to operate an ATS applies for a Part IV permission, the FSA will be minded to impose the requirements under section 43 of the Act (Imposition of requirements).

01/12/2004

MAR 5.4.4

If a firm that proposes to operate an ATS applies for a variation of Part IV permission to carry on an additional regulated activity necessary to operate the ATS, the FSA will be minded to impose the requirements under section 44 (Variation etc. at request of authorised person) or section 45 (Variation etc. on the Authority's own initiative) of the Act.

01/12/2004

MAR 5.4.5

In relation to current ATS operators, or firms proposing to operate an ATS that have permission to carry on the regulated activity necessary to operate the ATS, the FSA will be minded to impose the requirements under section 44 or 45 of the Act.

01/12/2004

MAR 5.4.6

The FSA may decide not to impose particular requirements in particular cases if it is not appropriate to do so. For example, the FSA will be minded not to impose requirements for pre-trade information to be provided to users or published on ATS operators that operate price taking systems or request for quote systems. Also, it will be minded not to impose requirements for publication of post-trade information on ATS operators that operate ATS's that facilitate trading in interest-rate swaps, contractually based investments relating to currency, or debt securities other than benchmark bonds.

01/12/2004

MAR 5.4.7

The FSA proposes to impose requirements for publication of pre-trade and post-trade information that are no more onerous in relation to an investment than the standard that applies under the Act or relevant national law of another State (as the case may be) to the exchange operating the underlying market for the investment.

01/12/2004

MAR 5.4.8

MAR 5 Annex 1 G sets out an illustration of the form of requirements that the FSA will be minded to impose on the Part IV permission of an ATS operator. The exact form may vary to take into account the matters referred to in MAR 5.4.2 G. The FSA may also consider setting out more detail in the requirements if the FSA considers it appropriate to do so (for example, if requested to do so by an ATS operator).

01/12/2004

MAR 5.5

Parts of the Handbook applicable to the operation of an ATS

01/12/2004

MAR 5.5.1

The purpose of this section is to help prospective and actual ATS operators find their way around the Handbook by setting out which parts of it apply to them when operating an ATS.

01/12/2004

MAR 5.5.2

The application of the Handbook to the operation of ATS's is summarised in MAR 5.5.3 G. ATS operators should read applicable parts of the Handbook to find out what the detailed regulatory requirements are for operating ATS's.

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MAR 5.5.3

Handbook provisions applicable to ATSs

Part of Handbook

Applicability to ATSs

High Level Standards

Principles for Businesses (PRIN)

This applies. However, note that some Principles are (partially) disapplied for clients that are market counterparties as further detailed in PRIN 3.4.

Senior management arrangements, Systems and Controls (SYSC)

This applies.

Threshold Conditions (COND)

This applies.

Statements of Principle and Code of Practice for Approved Persons (APER)

This applies to an approved person who performs a controlled function for an ATS operator.

The Fit and Proper test for Approved Persons (FIT)

This applies.

General provisions (GEN)

This applies.

Business standards

Interim Prudential sourcebooks (IPRU)

These apply, as appropriate.

Conduct of Business sourcebook (COB)

In general, COB applies to ATS operators.
Service companies that operate an ATS are subject to the provisions of COB mentioned in COB 1.2.1 (2)A.
There are special terms of business set out in COB 4.2.17 for ATS operators that have customers (as opposed to those whose only clients are market counterparties).
Most of COB will not apply to ATS operators if their business is wholly within the scope of Inter-Professional Conduct (Inter-professional conduct): see COB 1.3.4.

Market Conduct sourcebook (MAR)

The Code of Market Conduct (The Code of Market Conduct) applies. Price Stabilising Rules (Price Stabilising Rules)and Endorsement of the Takeover Code (Endorsement of the Takeover Code) are likely to be of limited relevance to the business of an ATS operator.
Inter-Professional Conduct (Inter-Professional Conduct will ordinarily be relevant to ATS's whose clients are market counterparties. MAR 3.4.10A G is particularly relevant to the information that these ATS operators should provide to their clients.
Ordinarily, service companies are not covered by Inter-Professional Conduct. However, MAR 3.1.1 R provides that MAR 3.4.10 G and MAR 3.4.10A G apply to a service company that operates an ATS.
MAR 5 (Alternative trading systems) is directly relevant to the operation of an ATS.

Training and Competence sourcebook (TC)

This applies.

Money Laundering sourcebook (ML)

This applies.

Regulatory process

Authorisation manual (AUTH)

This applies in relation to an application by a prospective ATS operator for authorisation. In particular, 3.24.1 provides that if an applicant who wishes to operate an ATS intends to assume responsibility for the clearing or settlement of transactions effected using the ATS, the applicant should provide sufficient information with its application to demonstrate that it has adequate arrangements in place to ensure efficient clearing or settlement (as the case may be) of the transactions.

Supervision manual (SUP)

This applies.

Enforcement manual (ENF)

This applies.

Decision making manual (DEC)

This applies.

Redress

Dispute resolution: Complaints sourcebook (DISP)

ATS operators are subject to the compulsory jurisdiction of the Financial Ombudsman Service.
However, a firm which notifies the FSA under DISP 1.1.7 that it does not conduct business with eligible complainants (persons eligible to have a complaint considered under the Financial Ombudsman Service, as defined in DISP 2.4) will be exempt from the rules on complaint handling procedures for firms (DISP 1.2 to DISP 1.7) and from the Financial Ombudsman Funding rules ( DISP 5.2 to DISP 5.8).

Redress

Compensation sourcebook (COMP)

COMP applies to all firms. However, ATS operators that do not conduct business that could give rise to a protected claim by an eligible claimant as defined and have no reasonable likelihood of doing so can gain exemption under COMP 13.3 from some compensation scheme levies.

Complaints against the FSA (COAF)

This applies.

Specialist sourcebooks

Collective Investment Schemes Sourcebook (CIS)

ECO applies to an ATS operator that is an electronic commerce activity provider.
REC does not apply to an ATS operator.
The other specialist sourcebooks are likely to be of limited relevance to an ATS operator in respect of its operation of an ATS.

Credit Unions (CRED)

Electronic money (ELM)

E-commerce Directive (ECO)

Lloyd's (LLD)

Professional firms (PROF)

Recognised Investment Exchanges and Recognised Clearing Houses (REC)

Service companies (SERV)

This applies to a service company that operates an ATS.

Energy market participants (EMPS)

This applies to an energy market participant that operates an ATS.

Oil market participants (OMPS)

This applies to an oil market participant that operates an ATS.

01/12/2004

MAR 5 Annex 1

Illustrative form of requirements: Alternative Trading Systems

01/12/2004

Fair and orderly trading

The firm must, in relation to the operation of an ATS, have appropriate arrangements in place designed to ensure:

(a)

efficient pricing and the equitable treatment of users;

(b)

a trading methodology that enables fair and orderly trading; and

(c)

that sufficient information about quotes, orders and completed transactions is made available to users.

Publication of pre-trade information

(1)

This requirement only applies in relation to shares traded on an ATS and only if those shares are also traded on a UK RIE or a regulated market.

(2)

The firm must, in relation to the operation of an ATS, have appropriate arrangements in place to make publicly available information about quotes or orders or both relating to shares traded on the ATS that the ATS displays or advertises to users.

Publication of post-trade information

(1)

This requirement only applies in relation to investments traded on an ATS if those investments, or investments that are substantially similar in nature, are traded on a UK RIE, a regulated market or an EEA commodities market.

(2)

The firm must, in relation to the operation of an ATS, have appropriate arrangements in place to make publicly available information about the price, volume and time of completed transactions for investments traded on the ATS. For large transactions in debt securities, an indication that volume exceeded a certain figure (not being less than £7 million or its equivalent) instead of the actual volume is sufficient.

Method of publication

Information about quotes, orders or transactions shall be treated as being publicly available under requirements 2 and 3 if it is available on reasonable commercial terms. The firm may make information publicly available under those requirements by publishing the information itself (for example, by posting data on a web-site) or by arranging with a third party (such as an information vendor, regulated market or consolidated quotation system) to publish the information.

Timing of publication

(1)

For the purposes of requirements 1, 2 and 3, information about quotes, orders and transactions should be made available in a timely manner. In particular, information should be made available to users and to subscribers close to the time when the quote or order is given or the transaction is executed. Information may be made available to persons other than users or subscribers with a reasonable delay.

(2)

The firm may make information about a large order, quote or transaction available to users under requirement 1 or publicly available under requirement 2 or 3 at a time later than that specified in (1), but only to the extent reasonably necessary to protect the interests of the relevant user who placed the order, gave the quote or executed the transaction.

Monitoring of trading

(1)

The firm must, in relation to the operation of an ATS :

(a)

have appropriate arrangements in place that enable it to monitor transactions undertaken on the ATS to identify suspected breaches of any rules relating to fair and orderly trading on the ATS and conduct that may constitute market abuse;

(b)

report suspected material breaches of its rules relating to fair and orderly trading on the ATS or suspected market abuse to the FSA and other appropriate organisations; and

(c)

supply relevant information to the FSA as soon as practicable regarding the suspected breaches or suspected market abuse and provide full assistance to the FSA in investigating the suspected breach or suspected market abuse.

(2)

The functions referred to in (1) may be performed by the firm itself or by another person (such as the operator of a regulated market for the particular investment ) under a formal arrangement with the firm .

(3)

In (1), "rules" includes protocols, procedures or terms of, or established under, any agreement between the firm and a user.

Meaning of "appropriate arrangements"

In requirements 1, 2, 3 and 6, "appropriate" means appropriate having regard to the nature of the system, the nature and liquidity of investments traded on the system, the experience of users, the extent to which the wider market in the particular investment involves private customers, and the significance of the system in the overall market for the investment and, also in relation to requirement 6, the susceptibility of the investment traded to market abuse.

Access to sufficient publicly available information

(1)

The firm must, in relation to the operation of an ATS, provide, or be reasonably satisfied that there is publicly available, sufficient information to enable users who are customers to make a reasonably informed judgement about the value of each investment traded on the system and the risks associated with that investment.

(2)

In (1), "sufficient" means sufficient taking into account the nature and experience of users of the system who are customers and the type of investment traded on the system.

(3)

For the purposes of (1), if an investment is admitted to trading on an RIE , a regulated market or an EEA commodities market (and is not suspended from trading on the RIE or market), the firm may be reasonably satisfied that there is publicly available sufficient information about that investment to enable users who are customers to make a reasonably informed judgement about the investment.

01/12/2004

Transitional Provisions and Schedules

MAR TP 1

Transitional Provisions

MAR TP 1.1

GEN contains some technical transitional provisions that apply throughout the Handbook and which are designed to ensure a smooth transition at commencement. These include transitional provisions relevant to record keeping and notification rules.

1) Transitional Provisions for The Code of Market Conduct - ( MAR 1)

There are no transitional provisions for The Code of Market Conduct (The Code of Market Conduct).

2) Transitional Provisions for Price stabilising rules ( Price Stabilising Rules )

SUP contains transitional provisions which carry forward into MAR 2 (Price stabilising rules) written concessions relating to pre-commencement provisions.

MAR TP 1.2

(1)

(2) Material provision to which transition al provision applies

(3)

(4) Transitional provision

(5) Transitional provision: dates in force

(6) Handbook provision: coming into force

MAR 2

Part 10 of the Financial Services (Conduct of Business) Rules 1990 applies in relation to an offer for cash, instead ofMAR 2, if:
(1) a public announcement of the offer which stated the offer price has been made before commencement; or
(2) the introductory period for the offer started not more than 60 days before commencement and the firm or other person so chooses and makes a written record of that choice before commencement.
A record in (2) must be retained for 3 years from the end of the stabilising period for the offer.
This transitional provision applies to an offer as defined in the 1990 Rules, and has effect as a price stabilising rule.

Commencement until the end of the stabilising period for the offer

Commencement

01/12/2004

MAR Sch 1

Record Keeping requirements

01/12/2004

MAR Sch 1.1

Handbook reference

Subject of record

Contents of record

When record must be made

Retention period

MAR 2.7R

Price stabilising action

Full details as noted in MAR 2.7.2 R

On initiation of stabilising action

3 years

MAR 3.5.4

Non Market Price Transactions

Details of steps taken in consideration of NMPTs

On considering the transaction

3 years

01/12/2004

MAR Sch 2

Notification requirements

01/12/2004

MAR Sch 2.1

There are no notification requirements in MAR .

01/12/2004

MAR Sch 3

Fees and other required payments

01/12/2004

MAR Sch 3.1

There are no requirements for fees or other payments in MAR.

01/12/2004

MAR Sch 4

Powers Exercised

01/12/2004

MAR Sch 4.1

The following powers in the Act have been exercised by the FSA to make the rules in MAR:

Section 118(8) (Market abuse)

Section 138 (General rule-making power)

Section 143 (Endorsement of codes etc.)

Section 144 (Price stabilising rules)

Section 145 (Financial promotion rules)

Section 149 (Evidential provisions)

Section 150(2) (Actions for damages)

Section 156 (General supplementary powers)

01/12/2004

MAR Sch 4.2

The following powers in the Act have been exercised by the FSA to give the guidance in MAR (including the guidance comprising of the Code of Market Conduct):

Section 119 (The code)

Section 120 (Provisions included in the Authority's code by reference to the City Code)

Section 157(1) (Guidance)

01/12/2004

MAR Sch 5

Rights of action for damages

01/12/2004

MAR Sch 5.1

The table below sets out the rules in MAR contravention of which by an authorised person may be actionable under section 150 of the Act (Actions for damages) by a person who suffers loss as a result of the contravention.

If a "yes" appears in the column headed "For private person?", the rule may be actionable by a " private person " under section 150 unless a "yes" appears in the column headed "Removed". A "yes" in the column headed "Removed" indicates that the FSA has removed the right of action under section 150(2) of the Act . If so, a reference to the rule in which it is removed is also given.

In accordance with the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256), a "private person" is:

any individual, except when acting in the course of carrying on a regulated activity; and

ii.

any person who is not an individual, except when acting in the course of carrying on business of any kind;but does not include a government, a local authority or an international organisation.

The column headed "For other person?" indicates whether the rule is actionable by a person other than a private person , in accordance with those Regulations. If so, an indication of the type of person by whom the rule is actionable is given.

01/12/2004

MAR Sch 5.2

Chapter / Appendix

Section / Annex

Paragraph

For Private Person?

Removed

For other person?

MAR 1 (no rules)

All rules in MAR 2 except MAR 2.3.3 R and MAR 2.3.4 EU

Yes

Yes MAR 2.1.9 R

MAR 2.3.3 R, MAR 2.3.4 EU and MAR 2.3.5 EU

All rules in MAR 3 except MAR 3.5.7 E

Yes

Yes MAR 3.1.5 R

MAR 3.5.7 E

MAR 4 (all rules)

Yes

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MAR Sch 6

Rules that can be waived

01/12/2004

MAR Sch 6.1

The rules in MAR can be waived by the FSA under section 148 of the Act (Modification or waiver of rules), except for:
MAR 2.1.1 R (2)(Application)
MAR 2.1.9 R (Actions for damages)
MAR 3.1.5 R(Actions for damages)

01/12/2004