Market cleanliness has been one of the FCA’s priorities for many years. Its crusade is now coming to a head, helped by an infusion of the data that firms must send it as a result of the European Union's second Markets in Financial Instruments Directive.

Recently the regulator drew a line under Operation Tabernula with the announcement of the conviction of Richard Baldwin for money laundering after reporting restrictions were lifted.

Baldwin was convicted of dealing in £1.5 million criminal property that represented the proceeds of a conspiracy to 'insider deal,' identified by one of the FCA’s largest and most complex investigations on the subject which, according to Bloomberg’s detailed account, started with a suspicious transaction report in 2007.

Market surveillance provides one way for the FCA to identify market abuse. According to its Annual Report, the FCA received more than 6,000 Suspicious Transaction and Order Reports (STORs) or other external notifications about potential market abuse in the past year.

These led the regulator to open 484 preliminary market abuse reviews, initiating 91 enforcement investigations and 72 non-enforcement actions (including supervisory 'interventions') and issuing letters of education. It also introduced a new measure of market cleanliness, the Abnormal Trading Volume ratio (ATV) which it based on data made available to it by MiFID II.

The FCA previously measured market cleanliness by calculating the percentage of UK takeover announcements that showed abnormal price movements in the 2-day period ahead of those announcements. The FCA is now using trading data that it draws from a wider period and product range (such as contracts for differences and spread bets where the underlying asset is a relevant equity) to identify abnormal increases in trading volumes prior to an unexpected and potentially price-sensitive announcement. The FCA’s analysis covers two periods:

• the Benchmark Period – a control period, occurring immediately before the Announcement Period of 20 working days;
• the Announcement Period - the period immediately before an unexpected, potentially price-sensitive announcement of 10 working days.

The FCA’s findings show that on average 6.3% of the 1,070 announcements it sampled in 2018 had a statistically significant increase in volume before the Announcement Period. This is a small proportion of the total UK equity market activity during 2018 but FCA believes that it could be an indication of market abuse; or, as the FCA acknowledges, it could be due to other factors, such as financial analysts and the media correctly assessing likely takeover targets or significant legitimate trades that happen to fall before an announcement.

This compares with the Market Cleanliness Statistic that the FCA has used since 2006, which suggests that 10% of takeovers in the UK were associated with abnormal price movements - down from 22% in 2017 and around 30% in 2009.

The FCA is able to point to Operation Tabernula and the large drop in its market (un)cleanliness figure as significant successes in its crusade against insider dealing. Its Annual Report and the introduction of the ATV make its continued commitment to market cleanliness - and the use of new techniques - clear. Firms should note that the FCA is now using MiFID II transaction reporting data that it has received since the first quarter of 2018 in its surveillance for market abuse, and is extending its surveillance to a longer period in which market abuse might occur and to a broader range of financial instruments.

For asset managers, the FCA’s announcements are a reminder of the importance of:

• strong controls over the use and availability of inside information;
• the establishment of appropriate internal surveillance arrangements to detect potentially abusive activity in the market;
• Suspicious Transaction and Order Reporting (STOR) by each manager and by its brokers; and
• providing the FCA with accurate MiFID transaction reporting data through regular completeness and accuracy checks of sample files that the FCA provides.

If you have ever wondered or been asked what the FCA does with all the transaction reports it receives, you now have an answer!

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk