The Financial Services Authority’s pilot findings on the mis-selling of interest rate hedging products, published today (document here, press release here), has an interesting short discussion of how the FSA determined whether a purchaser was “sophisticated”, at section 4 of the document.
Market abuse: £8 million fine on Swift Trade for “layering” confirmed by the Upper Tribunal: “as serious a case of market abuse of its kind as might be imagined”
The Upper Tribunal has confirmed the Financial Services Authority’s 2011 fine of £8 million on Swift Trade for market abuse. Our post on the FSA’s original 2011 action is here.
This is the largest fine ever imposed by the FSA for market manipulation (i.e. FSMA section 118(5)). The Tribunal’s decision is here.
From the FSA’s press release today:
“The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Swift Trade, a non-FSA authorised Canadian company with global operations, £8m for market abuse. The Tribunal described this as being “as serious a case of market abuse of its kind as might be imagined”.
Between 1 January 2007 and 4 January 2008, Swift Trade engaged in a systematic and deliberate form of manipulative trading known as “layering”. The manipulative trading caused a succession of small price movements in a wide range of individual shares on the London Stock Exchange (LSE) from which Swift Trade made substantial profits.
The trading was widespread and repeated on many occasions involving tens of thousands of orders by many individual traders sometimes acting in concert with each other across many locations worldwide.read more »
A useful article from Dechert, explaining what will happen to the section 397 Financial Services and Markets Act 2000 “misleading statements and practices” offence when the Financial Services Act 2012 comes into force in April 2013.
In short, the s397 offence will be replaced by three offences contained in section 89, 90 and 91 of the new Act – ‘misleading statements’ (section 89), ‘misleading impressions’ (section 90) and misleading statements and impressions in relation to benchmarks (section 91).
The Decert article also discusses the FCA’s powers to ban misleading financial promotions.
116 pages here.
A lengthy NYT article discusses the rise of crowdfunding and peer-to-peer lending in the United States, and the delay in writing new rules required under the JOBS Act as the SEC struggles to balance encouraging these new financing models with investor protection.
See also: Lots more crowdfunding posts.
AIFMD: ESMA consults on guidelines on key concepts, and on draft regulatory technical standards on types of AIFMs
The European Securities and Markets Authority launched two AIFMD-related consultations on 19 December 2012:
Consultation on guidelines on key concepts of the AIFMD.
- Consultation on draft regulatory technical standards on types of AIFMs.
From the press release:
“The European Securities and Markets Authority (ESMA) has launched a consultation on Guidelines on key concepts of the Alternative Investment Fund Managers Directive (AIFMD). The Directive provides the legal framework for both alternative investment funds (AIFs) and their managers (AIFMs).
ESMA’s draft guidelines are aimed at clarifying the rules applicable to hedge funds, private equity and real estate funds. These proposals help to clarify what entities fall under the remit of the AIFMD, thereby creating a level-playing-field by providing for consistent application of the provisions throughout the EU. In order to achieve this, the guidelines set out the criteria for what is considered to be:
• a collective investment undertaking;
• capital raising;
• defined investment policy; and
• the number of necessary investors.
The draft Guidelines will contribute to the creation of a level playing field in the area of AIFs.
Draft Technical Standards on Types of AIFMs
ESMA has also issued a consultation on Draft regulatory technical standards on types of AIFMs, which are aimed at ensuring the uniform application of the AIFMD across the EU. These standards distinguish between managers of AIFs whose investors have the right to redeem their shares at least annually (open-ended AIFs), and those whose investors have less frequent redemption rights.
Both papers follow an earlier discussion paper published by ESMA in February. For some of the issues covered in that paper, which are not addressed in the consultations published today, ESMA will take into account the Commission’s Level 2 implementing measures before deciding on the appropriate next steps.
The closing date for responses to these consultations is 1 February 2013. The Guidelines and Technical Standards will be finalised in the first half of 2013.”
The Bill received Royal Assent on 19 December 2012, becoming the Financial Services Act 2012.
HM Treasury confirmed on the same day that the Prudential Regulation Authority and the Financial Conduct Authority will start work on 1 April 2013: i.e. that is the legal cutover day to the new regulators.
The Treasury also confirmed that the FCA will take on responsibility for consumer credit regulation from 1 April 2014.
The Commission adopted the Delegated Regulation supplementing the Alternative Investment Fund Managers Directive on 19 December 2012. The Delegated Regulation can be read here.
From the press release:
“The AIFMD is part of the Union’s response to the financial crisis, and aims to create a comprehensive and effective regulatory and supervisory environment for alternative investment fund managers in Europe. The Delegated Regulation is a precondition for the application of the AIFMD in EU countries and was adopted to supplement certain elements of the AIFMD. These rules concern the:
- conditions and procedure for the determination and authorisation of AIFMs, including the capital requirements applicable to AIFMs;
- operating conditions for AIFMs, including rules on remuneration, conflicts of interest, risk management, liquidity management, investment in securitisation positions, organisational requirements, rules on valuation;
- conditions for delegation;
- rules on depositaries, including the depositary’s tasks and liability;
- reporting requirements and leverage calculation;
- rules for cooperation arrangements.
The Delegated Regulation adopted today is subject to a three-month scrutiny period by the European Parliament and the Council and will enter into force, provided that neither co-legislator objects, at the end of this period and the day following publication in the Official Journal.”
UPDATE 11 January 2013: Here is Nabarro on the implications of the Delegated Regulation.
“The FSA found that every LIBOR and EURIBOR submission, in currencies and tenors in which UBS traded during the relevant period, was at risk of having been improperly influenced to benefit derivatives trading positions”
FSA fines UBS £160 million for LIBOR, EURIBOR misconduct.
“UBS’s breaches of the FSA’s requirements encompassed a number of issues, involved a significant number of employees and occurred over a period of years in a number of countries. Between 1 January 2005 to 31 December 2010 the misconduct included:
• UBS’s traders routinely making requests to the individuals at UBS responsible for determining its LIBOR and EURIBOR submissions to adjust their submissions to benefit the traders’ trading positions.
• Giving the roles of determining its LIBOR and EURIBOR submissions to traders whose positions made a profit or loss depending on the LIBOR / EURIBOR fixes. This combination of roles was a fundamental flaw in organisational structure given the inherent conflict of interest between these two roles.
• Colluding with interdealer brokers in co-ordinated attempts to influence Japanese Yen (JPY) LIBOR submissions made by other panel banks. Corrupt brokerage payments were made to reward brokers for their efforts to manipulate the LIBOR submissions of panel banks.
• Colluding with individuals at other panel banks to get them to make JPY LIBOR submissions that benefited UBS’s trading positions.
• Adopting LIBOR submissions directives whose primary purpose was to protect the bank’s reputation by avoiding negative media attention about its submissions and speculation about its creditworthiness.
The misconduct was extensive and widespread. At least 2,000 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made. Manipulation was also discussed in internal open chat forums and group emails, and was widely known. At least 45 individuals including traders, managers and senior managers were involved in, or aware of, the practice of attempting to influence submissions. The routine and widespread manipulation of the submissions was not detected by Compliance or by Group Internal Audit, which undertook five audits of the relevant business area during the relevant period.
Even when the trading and submitting roles were split in Autumn 2009, UBS’s systems and controls did not prevent traders from camouflaging their requests as “market colour”. Given the widespread and routine nature of the requests to change LIBOR and EURIBOR and the nature of the control failures, the FSA found that every LIBOR and EURIBOR submission, in currencies and tenors in which UBS traded during the relevant period, was at risk of having been improperly influenced to benefit derivatives trading positions.
The misconduct occurred in various locations around the world including Japan, Switzerland, the UK and the USA.”
Much more LIBOR here.
“For the Regulations to enter into force, the formal approval by the Council and the European Parliament is still needed. It is expected that the decision by the Council will follow the plenary vote in the European Parliament in early 2013.”
The Serious Fraud Office announced today that it is bringing criminal charges against Magnus Peterson, founder of hedge fund Weavering Capital.
The SFO had dropped its investigation into Weavering, but re-opened it in July 2012 under its new director David Green QC, as we reported here.
The SFO’s initial decision to drop the case was particularly odd given the Cayman Grand Court’s civil findings against two of the fund’s directors – discussed in this post – and the UK High Court’s finding in a civil case that Magnus Peterson had committed fraud and breached his duties of care, as we covered in this post.
Big job: “Mr Sants will additionally take on responsibility for the bank’s relationships with governments and regulators around the world”
The former Chief Executive of the Financial Services Authority, Hector Sants, is off to Barclays as Head of Compliance and Government and Regulatory Relations:
“In this role, Mr Sants will oversee all compliance activities across Barclays, including all regions in which Barclays does business. In a major change this will mean, for the first time, that all compliance staff within the bank report to one individual, and operate independent of business and regional management teams.
Mr Sants will be directly accountable to the Group Chief Executive for the performance of the compliance function against a framework of specific standards agreed by the Barclays PLC Board, and for ensuring the conduct of all staff is consistent with Barclays purpose and values, as well as the spirit and letter of the law and the expectations of regulators in the geographies where Barclays operates.”
“Today the Serious Fraud Office, with the assistance of the City of London Police, executed search warrants at three residential premises in Surrey (1) and Essex (2). Three men, aged 33, 41 and 47, have been arrested and taken to a London police station for interview in connection with the investigation into the manipulation of LIBOR. The men are all British nationals currently living in the United Kingdom.”
See also: Alleged LIBOR manipulation – collection of posts
Summary of industry stance and the Treasury / FSA consultations promised in the New Year, from Pinsent Masons.
4 December 2012 speech by Jamie Symington, Head of Wholesale Enforcement at the Financial Services Authority; covers:
- The FSA’s policy of “credible deterrence:
- Rising number of STRs;
- SMARTS software to improve surveillance and detection of market abuse;
- Build-out of enforcement capability;
- Decline in suspicious activity pre-announcement of takeovers, to 20% in 2011;
- Market abuse successes;
- An overview of the Einhorn / Greenlight Capital case;
- Thematic and educational work; and
- The future approach of the FCA.
See also: Einhorn / Greenlight Capital posts.
The NYT Dealbook’s overview of the SAC / Martoma insider dealing case explains controlled-liability theory:
“…the S.E.C.’s warning is the boldest regulatory shot yet across SAC’s bow. The commission filed a parallel civil suit last week alongside the Justice Department’s criminal charges that named Mr. Martoma and CR Intrinsic, the SAC unit that employed Mr. Martoma, as defendants.
A person briefed on the investigation said that an additional action against SAC, or even Mr. Cohen, could involve accusations of fraud based on the so-called controlled-liability theory, meaning that it was in “control” of Mr. Martoma when he engaged in insider trading.”
See also: Expert network firms
Andrew Ross Sorkin on hedge funds and the perils of expert network firms, as exemplified by ongoing the SAC / Martoma insider case.
UBS sound pretty clueless by this account from the FSA (our emphasis added):
“The Financial Services Authority (FSA) has fined UBS AG (UBS) £29.7 million (discounted from £42.4 million for early settlement) for systems and controls failings that allowed an employee to cause substantial losses totalling US$2.3 billion as a result of unauthorised trading. The trader, Kweku Adoboli, has been convicted of two counts of fraud by abuse of position and sentenced to seven years’ imprisonment. The systems and controls failings revealed serious weaknesses in the firm’s procedures, management systems and internal controls.
On 14 September 2011 UBS became aware that unauthorised trading had been carried out between 1 June 2011 and 14 September 2011 (the Relevant Period) on the Exchange Traded Funds Desk (the Desk) in the Global Synthetic Equities (GSE) trading division conducted from the London Branch of UBS.
The losses were incurred primarily on exchange traded index future positions. The underlying positions were disguised by the use of late bookings of real trades, booking fictitious trades to internal accounts and the use of fictitious deferred settlement trades.
During the Relevant Period, there was insufficient focus on the key risks associated with unauthorised trading within the GSE business conducted from the London Branch. The significant control breakdowns allowed the trading to remain undetected for an extended period of time.read more »
Jessica Mang and Christina Weckwerth were, unknown to each other, the girlfriends of Thomas Ammann. Today they were found not guilty of insider dealing. Mr Ammann was found guilty of two counts of insider dealing and two counts of encouraging insider dealing. The tone of the FSA’s press release suggests disappointment at the acquittal of the girfriends:
The EU short selling regime came into force on 1 November 2012, as we discussed in this post.
The Financial Services Authority has now published the first list of short positions disclosed to it under the new regime. The list can be downloaded here (box at bottom right of page).
The largest short position is Greenlight Capital’s 4.37% short in Daily Mail & General Trust plc.
For the FSA’s factsheet on the Short Selling Regulation, see here.
On 1 November 2012 the Financial Services Authority issued a Policy Statement ”summarising the responses to our consultation on the proposed changes to the Handbook we need to make to comply with the EU Short Selling Regulation (SSR) from 1 November 2012, as well as our policies regarding the exercise of the discretions the SSR gives us”, and also published the changes to the FSA Handbook necessary to give effect to the SSR.
Section 397 FSMA: draft legislation to replace and extended published, to implement Wheatley recommendations on LIBOR
HM Treasury today published the legislation, to be contained in the Financial Services Bill, by which section 397 of the Financial Services and Markets Act 2000 will be replaced and extended to capture the making of misleading statements to manipulate benchmarks such as LIBOR. The draft legislation is here.
A good survey from the New York Times here.
“London’s fast-growing start-up scene is trying to disrupt the financial status quo. As consumers’ trust in banks deteriorates because of a series of recent scandals, young companies are pressing their newcomer advantage. Firms are offering services like low-cost foreign currency exchange and new ways for small business to borrow cash.
Backed by venture capital firms like Index Ventures, the financial start-ups are taking on entrenched incumbents by using technology to pare back costs and improve the customer experience.”
The European Commission today gave 10 EU member states the green light to go ahead with the introduction of a financial transactions tax through the enhanced cooperation procedure. The countries are Germany, France, Austria, Belgium, Portugal, Slovenia, Greece, Italy, Span and Slovakia.