Thoughts on The Recent FCA Market Watch Newsletters

Market Watch 76 – The FCA Draws a Line in the Sand with Respect to Flying and Printing

The FCA recently published the latest edition of its Market Watch newsletter (MW) 76, in which it revisited concerns about the practices known as flying and printing. The FCA had previously raised these practices as being of-concern in MW 57 back in November 2018.

What are flying and printing? In MW 57, the FCA defines them: 

• Flying occurs when a firm communicates to clients, or other market participants (via screen, instant message, voice, or some other method) that it has bids or offers when they are not supported by, or sometimes not even derived from, an order or a trader’s actual instruction. 

• Printing is when a firm communicates (by one of the above methods) that a trade has been executed at a specified price and/or size, when no such trade has taken place. 

Flying and printing are not victimless activities. In its earlier MW 57, the FCA asserts that “if false prices and/or trading activity are advertised to the market, then there is a risk that trading decisions may be made based on misleading information. This could cause market participants financial harm and would undermine the integrity of the market.” 

Are flying and printing happening today? In the wake of issuing MW 57, the FCA has noticed “… instances of possible flying and printing in several markets, including fixed income, commodities, and currencies,” in particular, bond, swaps, and options. These are all OTC markets where there might not be a centrally published price for an instrument. 

The FCA is clearly concerned that, although flying and printing is happening today, little is being done. I suspect one reason for this may be the fact that flying and printing aren’t specifically called out in the EU Market Abuse Regulation (MAR) laundry list of abuse scenarios. Although I would also point out that the broad, catch-all wording of Article 12.1.a(i) of UK MAR seems to implicitly cover flying and printing; this provision states that any act which “…gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument…” (which is exactly what flying and printing are intended to do) is market manipulation and is therefore illegal. 

While this provision against flying and printing is strongly called out in MW 76, it’s also interesting to note that the FCA took a softer approach in MW 57, referring to potential breaches of its Principles for Businesses (PRIN) and standards of conduct for approved persons, with an emphasis on training and informing staff. Monitoring for potential breaches came next and inclusion in a risk assessment was almost an afterthought. 

Fast forward five years to MW 76 and the regulatory message is now much stronger, with the FCA recommending more prescriptive actions and swift intervention when such behaviors threaten the confidence in and fairness of UK financial markets. 

To combat these activities, the FCA suggests firms:

• Update compliance manuals to include prohibitions on flying and printing, demand periodic attestations from staff and encourage a culture of compliance (and document these steps)
• Train staff on these prohibitions and warn of the consequences of breaches
• Update surveillance to assure that flying and printing can be detected, through order / trade and communications surveillance channels, and appropriate risk assessments
• Update disciplinary procedures to consistently deal with breaches
• Communicate that compliance trumps profits 

In short, the tone of MW 76 suggests the FCA has run out of patience. It noticed these problems five years ago, and now appears annoyed to see that little has been done to address them. With MW 76, the FCA has drawn a clear line in the sand that this approach will have to change. 

Market Watch 77 – FCA Raises Concerns About Organized Crime Groups. 

In Market Watch (MW) 77, the FCA raises concerns that an apparently “significant component” of suspicious trading in products based on equity markets is due to “suspicious trading by members of OCGs (organised crime groups)”. The FCA also issued a separate press release outlining a joint investigation with the UK National Crime Agency, under which four men have been interviewed under caution. Both MW 77 and the separate press release suggest a transnational aspect to this investigation. 

Perhaps most alarmingly, the FCA warns that it is “likely that OCGs’ recruitment of information sources is targeted at junior members of staff” of M&A advisory firms and therefore, firms should refrain from referring to staff members involved in deals beyond their regular senior business contacts, in the firm’s own social media output. 

The FCA sets out suspicious behaviour that firms should be looking out for, including:

• Clients regularly generating Suspicious Transaction & Order Reports (STORs) 
• Clients frequently trading before announcements of M&A activity 
• Clients opening positions shortly before, and closing positions shortly after, publication of speculation about M&A in the media, without waiting until any relevant issuer has commented on the speculation 
• Several clients trading in the same security for the first time 
• Clients with any connection to other current or former clients about whom the firm has concerns, or whose trade has resulted in STORs. This might include trading in similar ways 

All of these behaviors are not difficult to detect, using a combination of trade and AML surveillance, and traditional account monitoring. Alongside these, the FCA suggests that firms consider the following measures:

• Communicating to all clients and prospects, that the firm has a zero-tolerance approach to market abuse, has an open relationship with its regulator, submits STORs, terminates suspicious accounts, and liaises with law enforcement agencies as appropriate
• Requesting all overseas broking firms that are clients to submit evidence of adequate surveillance arrangements and a zero-tolerance approach to market abuse
• Regarding trades placed before media reports of M&A as potentially suspicious, and submitting STORs where appropriate, even if no public confirmation of the matter described in the media reports is made 

There’s no strict schedule by which the FCA releases Market Watch newsletters: they can be released whenever the FCA thinks it needs to communicate something on a topic. That said, there is usually a gap of several weeks, if not months, between editions (for example, 3 months elapsed between MW 75 and MW 76): so to have only 14 days between MW 76 and MW 77 suggests that the FCA wanted to raise awareness of this risk as soon as possible. Unsaid in MW 77 is the fear that OCGs may use markets to not only commit market abuse but also to use that activity as a screen for money laundering; hence I would suggest MW 77 is something of a follow-on from TR19/4, the FCA’s 2019 Thematic Review into money-laundering risks in capital markets. 

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