RegulationDec 19 2013

Court backs FCA interpretation of market abuse rules

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Trading activities based on buying derivatives rather actual shares can be considered as ‘market abuse’ under existing laws where they breach regulatory guidelines, the Financial Conduct Authority has said after it scored a landmark victory in the Court of Appeal.

The court agreed with the Upper Tribunal and the Financial Conduct Authority that a now-defunct Canadian trading platform known as Swift Trade had engaged in market abuse, clearing the way for an £8m fine initially handed down two years ago.

The Upper Tribunal previously ruled in January of this year that Swift Trade had to pay the Financial Services Authority penalty after it rejected an appeal by the company and its chief executive officer Peter Black against a decision notice issued in October 2011.

The Tribunal ruled that the FSA could take action against the dissolved Canadian corporation even though it was regulated in Canada and had no place of business in the UK.

According to the then Financial Services Authority, Swift Trade’s activities in placing large numbers of ‘contract for difference’ (CFD) trades on order books caused several price movements on the London Stock Exchange from which it profited between January 2007 and January 2008.

The regulator said this amounted to market abuse as defined under the Financial Services and Markets Act as CFDs “will be mirrored automatically in orders in shares” and thus will effect “transactions or orders to trade in... qualifying investments” as defined under the legislation.

CFDs are derivatives that allow investors to bet on price movements by providing a return based on the difference between the opening and closing price are a given security or market. The products are typically leveraged, meaning that gains - and losses - can be large.

After the Upper Tribunal backed the FSA’s verdict, Mr Black appealed the decision in the courts on the grounds that trading in conflicts of interest rather than shares could not be considered abusive under the Act, and that the action was “a nullity” due to the firm having be dissolved.

Today (19 December) the Court of Appeal handed down its judgement finding in favour of the regulator and the Tribunal.

It agreed with the regulator’s intepretation that the ‘layering activity’ was in relation to qualifying investments as set out under the Financial Services and Markets Act, that Swift Trade had effected the transactions or orders to trade and therefore that it had engaged in market abuse.

The FCA said: “This is an important decision which confirms that the FCA’s interpretation of the Act was correct and that a market participant such as Swift Trade, which knows that the orders it places in CFDs will be mirrored automatically in orders in shares, will be effecting transactions or orders to trade in... qualifying investments and can therefore be found to have engaged in market abuse according to s.118 FSMA.”