The Code of Market Conduct

Part

MAR Market Conduct

Chapter

The Code of Market Conduct

Printed on: 17/06/2024

Rulebook at: 01/12/2004

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