The FCA has published Market Watch 52.

In this issue of Market Watch the FCA focuses on its requirements concerning dividend arbitrage.

The intention of dividend arbitrage is to place shares in alternative tax jurisdictions around dividend dates, with the aim of minimising withholding taxes (WHT), or generating WHT reclaims. This may involve several different trading activities including trading and lending securities and trading derivatives, including futures and total return swaps, designed to hedge movements in the price of the securities over the dividend dates.

In this issue of Market Watch the FCA reminds firms of their responsibilities when executing transactions with, or on behalf of, clients engaged in dividend arbitrage. These include:

  • firms must comply with the FCA’s requirements regarding financial crime risk;
  • firms must have effective processes for carrying out due diligence on new business proposals, on new clients and for monitoring ongoing business;
  • firms should have a good understanding of the risks that are relevant to their business, as well as strong controls for mitigating those risks;
  • firms must have the appropriate management oversight and controls in place to minimise the extent to which it is possible for its business to be used for a purpose connected with financial crime;
  • the suspicious activity reports (SARs) regime (administered by the UK Financial Investigation Unit, National Crime Agency) requires firms to report transactions where there is a suspicion of money laundering. Failure to do so may result in an offence under the Proceeds of Crime Act 2002;
  • the Market Abuse Regulation (MAR) requires persons professionally arranging or executing transactions in financial instruments to report suspicious orders and transactions, where they have ‘reasonable suspicion’ that an order or transaction could constitute market abuse, to the FCA without delay. In addition, MAR requires market operators and investment firms that operate a trading venue to report orders and transactions that ‘could constitute’ market abuse to the FCA without delay; and
  • the FCA expects firms to be aware of their obligations under Principle 11 of its Principles for Businesses (dealing with the regulator in an open and cooperative way). This includes reporting other suspicious trading activity not necessarily covered by the SARs regime, or by MAR.

View Market Watch 52, 2 June 2017