On 31 October 2023, the FCA published Market Watch 75.

In this edition of Market Watch, the FCA shares its observations about market soundings since it published Market Watch 51 and 58. It also reminds firms of the arrangements made by the UK Market Abuse Regulation’s market soundings regime, which provides formalised arrangements for issuers, and their advisors acting as Disclosing Market Participants (DMPs), to legitimately disclose inside information where the disclosure is made in the normal exercise of a person’s employment, profession or duties.

The FCA highlights the following recent observations:

• It has observed cases where market soundings recipients (MSRs) have traded the relevant financial instruments during the time period after a DMP has initially communicated with them or sought their consent to receive the sounding and inside information, but before the DMP has disclosed the inside information. The DMPs did not, during the initial communication, disclose the identities of the financial instruments or the nature of the proposed transaction and the likelihood of its taking place. However, the MSRs were still able to identify those details using other information available to them. Frequently, this has occurred where there has been a delay between DMPs requesting the MSR’s consent and the MSR giving it.
• In these instances, the MSRs have provided rationales that are not easily reconcilable with the circumstances of the trading. For example, an MSR selling a financial instrument immediately after a DMP has sought its consent to receive inside information, then buying the same quantity of the financial instrument back in the subsequent placing does not reconcile with ‘Rebalancing a portfolio’. Nor does this rationale reconcile easily with instructions to trade being phrased with urgency.

Following these observations, the FCA recommends that firms take the following actions (amongst others) to minimise the risks of insider dealing and unlawful disclosure:

• DMPs should take particular care when making soundings on financial instruments that have few actors and where potential external information the MSRs hold could reasonably be used to identify the relevant financial instrument.
• When initially communicating with MSRs, and seeking their consent to receive the market sounding and inside information, DMPs should also be alert to the risk of unlawfully disclosing inside information. They should consider whether the information provided at this stage is essential for MSRs to decide if they wish to receive the information.
• DMPs may also want to consider specific arrangements and scripts where the MSR is a private individual whose awareness of possible breaches may be less than those of corporate clients.
• DMPs should carefully consider and assess the standardised information which they intend to provide to MSRs in their initial communications and requests for consent. They should make clear at the start of any market sounding that the communication is a market sounding.
• DMPs and MSRs should consider minimising time intervals between the DMP’s initial communications and requests for consent, and the MSRs consenting to such requests.
• Firms and their employees should be aware of the breadth of information that the FCA can request and which is available to the FCA when reviewing trades, communications and documentation relating to soundings.