FINMA-Circ. 08/38 "Market conduct rules"
(status: 1 April 2009)
A. MARGIN NO. 2: ACCEPTED MARKET PRACTICES
1. The definitive version of the Circular refers only to "accepted market practices", and the term "safe harbour rules" no longer appears. Why?
The change to "accepted market practices" and the restriction to this term alone can be attributed to the terminology used in European Union law. EU law makes a distinction between "safe harbour rules" and "accepted market practices": when the conditions of a safe harbour rule are satisfied, market abuse can essentially be ruled out, whereas "accepted market practices" imply merely an assumption that a transaction has a lawful basis (see Market Abuse Directive, Level 3, CESR 04/5050, margin no. 2.6). Consequently, a proposal was submitted during the consultation period to have this distinction between "safe harbour rules" and "accepted market practices" explicitly set down in the Circular as well. The SFBC was not convinced by this concept. Its opinion was that it posed a threat in that a safe harbour rule could be invoked on an irrefutable basis and it would thus become impossible to prove market abuse. The concept of an absolutely valid and irrefutable supposition within the meaning of an "EU safe harbour" was therefore to be rejected in favour of a mechanism of a refutable supposition in the sense of an "accepted market practice". However, in order to remain consistent with EU terminology, the term "safe harbour rules" in margin no. 2 was replaced by "accepted market practices". It is thus defined that, although the rule can be applied, it can only be applied in bona fide situations.
B. MARGIN NO. 5: CLARIFICATION OF CLIENT TRANSACTIONS
2. Are securities dealers now under an obligation to monitor their clients' securities transactions?
The obligation set out in margin no. 5 resulting from the proper business conduct requirement prescribes that securities dealers look into the basis of transactions where there are clear indications that securities transactions for clients are not in compliance with market conduct rules and, if necessary, that they refrain from involvement in the client's securities transactions. In accordance with the long-standing, established supervisory practice in respect of irreproachable business conduct, one particular element required is that the economic background of a transaction must be investigated if there are signs of any irregularities. Such clarification is thus to be carried out if, on the basis of certain indications or unusual circumstances, a transaction can reasonably be presumed to be unlawful or unethical. This also applies in the context of market conduct rules if there are clear indications that these rules have been breached. It cannot therefore be assumed that securities dealers do not bear any sort of responsibility whatsoever for the lawfulness or validity of client transactions. A proactive approach is not required, however, and the securities dealer can basically trust the information given by the client.
This said, the brevity of the formulation of margin no. 5 appeared to have the effect of making this obligation to investigate the background of a client transaction and the associated link with the practice concerning the assurance of proper business conduct insufficiently clear. This was why the text was amended as follows on 1 December 2008: the formulation used was changed to "clear indications" and an explanatory remark "systematic surveillance and investigation are not required" was added.
C. MARGIN NO. 6: SCOPE OF APPLICATION IN RESPECT OF COLLECTIVE INVESTMENT SCHEMES
3. Does the Circular also apply to fund management companies which have delegated their investment decisions and do not themselves conduct asset management?
Licensed bodies pursuant to Article 13 para. 2 let a (fund management companies) and let. b (SICAVs) of the Swiss Federal Act on Collective Investment Schemes (CISA; SR 951.31) do not fall within the scope of the Circular if they
- have delegated their investment decisions to a body within the meaning of Article 13 para. 2 let. f CISA (asset managers) which is already subject to the Circular; or
- have delegated their investment decisions to a foreign asset manager which is subject to prudential supervision and market supervision equivalent to that in Switzerland.
If the asset manager does not meet these conditions, the fund management company or the SICAV must itself ensure compliance with the Circular or must expressly assign responsibility for such to the asset manager. This applies in particular when, based on Article 10 para. 5 CISA and in application of Article 31 para. 3 CISA, the fund has been exempted from the requirement to delegate investment decisions only to asset managers subject to supervision.
D. MARGIN NO. 31: PRICE STABILISATION IN ISSUES
4. Where and how are the parameters for price stabilisation measures to be published for the public placement of securities?
For public placements, it is sufficient for price stabilisation parameters to be published in the issue prospectus before the placement takes place.
5. How should the price spread – which is not yet known when trading commences – be defined and communicated?
In respect of the price spread, it can be communicated that stabilisation transactions will only be carried out below the issue price.
E. MARGIN NO. 35: PERMISSIBLE MATCHED ORDERS FOR CLIENTS
6. Does the securities dealer have to check whether matched orders are taking place for permissible reasons and – if so – what must this check entail?
The problem is similar to that described in margin no. 5. When there are clear indications that the client is making improper use of the grounds for order matching, the transaction should be investigated. A systematic plausibility check is not required, however. Here, too, the securities dealer can essentially trust the information provided by the client.
F. MARGIN NO. 42: FRONT-, PARALLEL- AND AFTER-RUNNING
7. What do front-, parallel- and after-running mean?
Making use of client orders to execute parallel trades in advance, simultaneously or immediately afterwards entails elements of information abuse and breaches of good faith. Front- and parallel-running are distinct in nature from after-running.
Front- and parallel-running refer to instances where price movements are exploited either in advance of or simultaneously with client orders. Such preceding or parallel trades make use of the price movements sparked by the client order. They also distort the client order in a manner that runs counter to the principle of good faith.
In contrast, after-running makes use of knowledge on an after-the-fact basis; i.e. after client orders have been carried out. Knowledge of the client's orders gives the dealer knowledge of the client's strategy, and he or she subsequently makes use of this knowledge for his or her own benefit; information pertaining to the client order is exploited via transactions carried out subsequently.
G. MARGIN NO. 54: WATCH LIST
8. Depending on the securities dealer's legal form and size, can solutions comprising multiple lists – sometimes with different or additional content and with different designations – also be envisaged?
The answer here is yes, since such instruments evolve as time goes on and are also managed under different names. What is important is that control instruments that fulfil the same function as the watch list stipulated in the Circular are in place.
H. MARGIN NO. 56: "SURVEILLANCE" OF STAFF TRANSACTIONS
9. Do the bank accounts of employees who are not involved in trading also have to be monitored?
The obligation to monitor employee transactions was deliberately defined as a basic principle which leaves scope open so that every institution could implement a tailored solution in the appropriate form (size, number of employees, etc.) in this area. There is thus scope for appropriate solutions. What is important is that all an institution’s employees are covered by this surveillance. It makes sense for the solution to be determined together with the institution’s auditors.
10. Do the external bank account details of bank employees have to be specified, indicating the name of the third-party institutions where they have their accounts, or is it enough to indicate merely that they have such accounts?
The more information available, the more effective monitoring can be. A greater level of transparency allows for a greater level of effectiveness in preventing the misuse of confidential price-sensitive information. In this respect, the primary emphasis is on providing clear, concrete information on banking relations (number of accounts and banks involved). It is vital that, whenever necessary, access can be provided to all private trading activities. This is the minimum standard to be ensured.
11. Is an annual letter of confirmation from employees sufficient, or do employees have to disclose to their employers every transaction carried out with third-party institutions?
Here, too, there is scope for appropriate solutions. At the larger end of the scale, ongoing reporting would certainly be desirable; with smaller institutions, however, it may be sufficient for employee transactions to be reported and registered periodically. Annual reporting is not sufficient, however.
12. Is it only custody accounts that are affected by these disclosure requirements, or are ordinary bank accounts affected as well?
All bank accounts used for the purposes of securities transactions must be disclosed. Consequently, it is not only custody accounts that are of interest in respect of monitoring employees' securities transactions. A comprehensive overview can only be obtained if ordinary accounts are disclosed as well.
13. Do employees have to give prior consent for such monitoring, particularly in respect of the obligation placed on them to submit documents relating to their bank accounts and transactions where necessary?
The internal employee directives for securities dealers are a component of employment contracts. To this extent, the employee is effectively giving such consent when he/she signs his or her employment contract and the accompanying confirmation that he/she has taken note of said directives, which stipulate, inter alia, that employee transactions will be monitored and set out the obligations connected with this.
I. MARGIN NO. 64: DOCUMENTATION AND RECORDING REQUIREMENTS
14. Which employees are meant by "employees working in securities trading"? Only those actually involved in trades, or client advisors who pass on client orders as well?
The obligation to record conversations applies in principle to all calls received by dealers at the trading desk, i.e. all external calls from clients received in the trading area and all internal calls (e.g. from client advisors) made in the trading area. There is, however, an additional recommendation that, depending on the circumstances involved, the recording of the calls between client advisors and big institutional investors should be considered as well, something which would also be in the interests of securities dealers themselves.
15. To what extent do documentation and recording requirements also apply to small institutions which do not themselves carry out client orders but which only forward them to stock exchange participants and have no direct access themselves to the stock exchanges?
Analogous to the answer to question 14, for securities dealers and banks that are not themselves stock exchange participants, all conversations involving those employees who forward client orders to the correspondent banks which then execute these orders as stock exchange participants are in principle to be recorded.
16. Does the term "electronic correspondence" refer exclusively to e-mail or does it also include information exchanged via other systems, such as chat forums?
The term "electronic correspondence (e-mail)" covers every written electronic communication; i.e. also such communication as takes place via the Reuters trading system or Bloomberg Chat, etc.
17. Should the calls made by employees working in securities trading via mobile phones made available by employers also be recorded?
In principle, yes, particularly if the phones are used in the trading area or by employees who work in the trading area. If calls cannot be recorded for technical reasons or if the effort involved in making such recordings possible were to go beyond a level that could be described as reasonable, a ban on mobile phones being used in the trading area should be considered. When mobile phones are used outside the trading area, at the very least lists should be kept of the calls made and received.
18. Are e-mails sent via mobile phones and text messages also affected?
This is subject to the conditions described in Answer 17 and provided that the effort required to make this technically possible is within reasonable limits.
J. MARGIN NO. 66: TRANSITIONAL PERIOD
19. Does prior approval need to be sought from FINMA before a company decides not to comply with these organisational requirements?
No – the auditors have to state whether it is reasonable for the company not to comply with individual organisational requirements taking into account the business activities, size or structure of said company.
K. INFORMATION
20. Whom can I contact if I have further questions?
enforcement-marketsupervision@finma.ch or phone 031 327 92 40