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Market Watch 75: The market soundings procedure

Written by Michael Channing

Market Watch 75: The market soundings procedure

FCA Releases Market Watch 75

The FCA’s latest Market Watch Newsletter puts the spotlight on the market soundings procedure. The regulator shares its observations about developments around market soundings since the publication of Market Watch 51 and 58, and highlights the need for firms to adhere to regulations around the disclosure of inside information under the UK Market Abuse Regulation’s Market Soundings Regime 

Understanding the market soundings procedure 

Market soundings are a vital part of the pre-deal research process. They provide a structured way for issuers, investment banks, and other authorised parties to gauge investor interest in a potential transaction, such as a new issuance of securities or a corporate takeover. Market soundings allow market participants to assess market conditions, demand, and investor sentiment, contributing to the optimisation of pricing and risk management.

The UK Market Abuse Regulation (UK MAR), which lays down the regulatory framework for preventing market abuse and insider dealing, contains provisions specifically related to market soundings. These provisions - referred to as the UK MAR Market Soundings Regime - are designed to facilitate the legitimate disclosure of inside information by Disclosing Market Participants (DMPs).

Impact on inside information disclosure

The UK MAR Market Soundings Regime lays out a series of requirements which DMPs must follow in order to legitimately disclose inside information as part of the market sounding process, including: 

  1. Assessing and recording whether a market sounding will involve disclosing inside information 
  2. Producing standardised procedures and scripts for communications with Market Sounding Recipients (MSRs) during market soundings 
  3. Getting MSRs’ consent to receive a market sounding and inside information 
  4. Informing MSRs that they are prohibited from using the information to trade or attempt to trade relevant instruments 
  5. Making and maintaining a record of all the communications with, and all the information given to, MSRs 

Independent assessment of inside information by MSRs

The regulator also makes the point that MSRs must independently assess if they possess inside information from the market sounding which would prohibit them from trading. To help MSRs in reaching this conclusion, the FCA has directed firms  towards the ESMA’s Market Sounding Guidelines which provide further insights into the arrangements by which Market Sounding Recipients (MSRs) should receive, protect, and handle inside information. These include:

  1. Independent Assessment: MSRs must independently assess whether they possess inside information, taking into account both the DMP’s assessment and any other information available to the MSR.
  2. Recording of market soundings: MSRs must record the market soundings they receive as well as their inside information assessments
  3. Need-to-Know Basis: MSRs should only disseminate information on a “need-to-know” basis, meaning they should receive only the information necessary for their legitimate business purposes.

Minimising the risks of insider dealing and unlawful disclosure

The regulator claims that there have been many observed cases where MSRs have traded the relevant financial instruments after the DMP has initially sought their consent to receive inside information, but before the DMP has disclosed the inside information. In these instances, it is possible that MSRs would be able to identify the financial instruments referred to before they consent to receiving and protecting the inside information contained in the market soundings, allowing them to trade said instruments with an unfair advantage. 

In these cases, it is especially important that MSRs follow the above steps to independently assess whether or not they possess inside information before trading. 

To minimise the risk of insider dealing and unlawful disclosure, the FCA argues that DMPs should take particular care when making soundings on financial instruments that have few actors and where potential external information could reasonably be used to identify the relevant financial instrument. They should also attempt to limit the information shared with MSRs during the sounding process or tailor the information they plan to give so that they do not inadvertently disclose inside information.

To help maintain oversight of the risk of unlawful disclosure and insider trading, a trade surveillance system with a watch list functionality is next to essential. TZ Trade Surveillance provides users with watch list functionality which allows users to monitor all staff members with access to inside information. This feature also identifies instruments to which this inside information relates.  

Any trading undertaken in these instruments by persons on this list will be flagged for further review, allowing you to ensure that the risk of insider dealing is minimised. 

For more information on our watch list and insider list functionality, get in touch.