Regulatory Aspects Governing the Market Behaviour in Securities Trading (Code of Conduct for Securities Markets)

Transcription

1 Circular 08/38 of the Swiss Financial Market Supervisory Authority Regulatory Aspects Governing the Market Behaviour in Securities Trading (Code of Conduct for Securities Markets) Unofficial translation by PricewaterhouseCoopers January

2 Circular 08/38 of the Financial Market Supervisory Authority Regulatory Aspects Governing the Market Behaviour in Securities Trading (Code of Conduct for Securities Markets) Table of Contents I. Purpose Margin no. 1 3 II. Scope of Application Margin no. 4 6 III. Use of Confidential Price-sensitive Information Margin no IV. Genuine Supply-and-Demand Behaviour Margin no V. Circulation of Confidential Price-sensitive Information Margin no VI. Applying the Principle of Bona Fide Behaviour Margin no VII. Organisational Requirements Applicable for Securities Dealers Margin no A. Confidential Price-sensitive Information Margin no B. Chinese Walls / Area of Confidentiality Margin no C. Non-confidential Transactions Margin no D. Watch List Margin no. 54 E. Restricted List Margin no. 55 F. Monitoring Employee Transactions Margin no. 56 G. Placing Securities at the Time of Issue Margin no H. Financial Analysts Margin no I. Credit Rating Margin no J. Duty to Record Margin no K. Audit Margin no. 65 L. Transitional Period Margin no. 66 2

3 I. Purpose According to its purpose clause (art. 1 SESTA), the Federal Act on Stock Exchanges and Securities Trading is to ensure the transparency and functionality of securities markets and guarantee the equal treatment of investors. For this purpose, art. 6 SESTA requires monitoring of market activity, so that the misuse of confidential knowledge, price manipulations or other breaches of the law may be detected. The present circular defines a regulatory code of market behaviour rules, applicable to regulated market participants when trading securities. It contains instructions on how to avoid market abuse and examples of accepted market practices. The requirements and duties are based on the principles of proper business conduct as stipulated in art. 10 para. 2 lit. d SESTA and art. 11 SESTA. They are part of the legal supervisory framework and are self-contained; specifically, their content exceeds that of art. 161 and 161 bis of the Swiss Penal Code (decision of the Swiss Federal Court made on 2 February 2000, also refer to SFBC bulletin 40/2000, 37 seqq.). The duty to organise an institution as described in section VII is based on art. 10 para. 2 lit. a SESTA II. Scope of Application This circular applies to all securities dealers subject to the Federal Act on Stock Exchanges and Securities Trading. Should there be any indications that securities trading on behalf of clients is incompatible with the requirements stipulated in sections III to VI, the securities dealers in question must clarify the commercial background of the transaction and, if necessary, abstain from executing the trade for the client. Banks that do not hold the status of securities dealer and persons subject to authorisation as per art. 13 para. 2 lit. a, b, c, d and f, as well as art. 13 para. 4 CISA, which engage in proprietary securities trading or trading on behalf of clients, must also comply with the rules defined in sections III to VI. These requirements and duties are based on the principles of proper business conduct (art. 3 para. 2 lit. c BA, art. 14 para. 1 lit. a CISA) III. Use of Confidential and Price-sensitive Information The trading of securities must take place on the basis of publicly available and published information on securities and issuers, or on information derived thereof. Information on securities and issuers is considered to be publicly available if it is published and circulated in the media or via information channels customary to the financial sector, or if it is derived thereof. 7 8 All other information on securities and issuers must be regarded as confidential. 9 Misusing the knowledge of confidential, price-sensitive information to trade in securities is illegal (misuse of information). 10 3

4 Information is to be considered price-sensitive if knowledge thereof significantly influences the market price or the valuation of the securities in question. Specifically, such information refers to circumstances which substantially influence a company s organisational structure, its governing and executive bodies, its course of business, its assets or earnings position and thereby, also its valuation. Hence, knowledge of these circumstances could significantly affect the price fetched on the exchange. Possibly, they require a public announcement or are subject to the legal or regulatory duty of disclosure (duty to disclose as per art. 20 SESTA or the stipulations on ad-hoc publicity in the exchange directives). Making confidential, price-sensitive information available unjustifiably, implying or making recommendation to trade these securities based thereon is also considered to be a misuse of information. Rumours or vague hints are not considered to be confidential information. However, knowingly spreading rumours or vague hints in the intent of then relying on them is not acceptable. It is also not permitted to take advantage of an expected reaction of market participants and the price of securities in the knowledge that information related to these securities is about to be published in the form of an investment recommendation (scalping) The following securities deals and conduct are permitted: Securities deals outside a separate area of confidentiality: organisational measures must ensure that no confidential, price-sensitive information is used for securities deals (for details, see section VII). Securities deals which are proven to have been conducted despite knowledge of confidential, price-sensitive information but which would also have taken place without the knowledge thereof. The purchase of securities of a company to be acquired, either by the potential acquirer itself or by a third party instructed by the ultimate acquirer in order to prepare the acquisition. Passing on confidential, price-sensitive information to contracted third parties (e.g. consultants in the case of a merger). The continuation of previously defined investment strategies, which had been defined independently of confidential, price-sensitive information. Hedging transactions, proprietary trading and market making on the basis of information a trader gathers due to his/her positions or the order book of the exchanges. Repurchasing own securities in preparation or in the context of a buyback programme as per Memo no. 1 of the Swiss Take-Over Board: Repurchasing shares IV. Genuine Supply-and-Demand Behaviour Securities deals must be based on a commercial reasoning and trading activities are based on a genuine supply-and-demand behaviour. Securities deals or orders placed with the pure intent of giving the impression of market activity or distorting the liquidity, market price or valuation of securities, as well as entering into fictitious trades (buy or sell) is considered to be illegal (market manipulation). The following behaviours and manners of conduct are indications of market manipulation (possibly, individual stock exchanges may provide a more detailed list in this regard):

5 Buying and selling the same securities in quick sequence by the same beneficial owner (wash trades). Parallel buy and sell orders of the same securities on a dealer s proprietary trading account ( nostro-nostro in-house cross ). Mutual agreement among several parties to enter parallel buy and sell orders of the same securities with the intent to distort the liquidity or market price of these (improper matched orders, daisy chains). Knowingly causing distortion of liquidity or market prices by backlogging buy or sell orders (ramping up, capping, pegging). Building up large positions with the intent to cause a short supply in the market (squeezing, cornering the market). Placing fictitious trades in large, aggregated blocks in a trade system with the intention of immediately cancelling these again (spoofing) The following securities deals and conduct are permitted: Securities deals with the purpose of stabilising prices or managing the price of a security (temporary smoothening of volatile market prices) for a pre-defined, extensible period (once defined, this period and the stabilising intentions must be reported to the exchange, however, it does not need to be published). Price-stabilising measures once securities have been publicly placed on the market for a limited period (syndicate bid). The parameter of such a price-stabilising exercise must be published prior to the begin of trading (actual stabilisation, rate margin, period) Securities trading within offering bid and ask prices (market making). 32 Repurchasing own securities in the context of a buyback programme as per Memo no. 1 of the Swiss Take-Over Board: Repurchasing shares. Nostro-nostro in-house crosses, provided the parallel trades are placed in the exchange system independently of each other and without previous agreement. Matched orders, provided they are placed based on a commercial reasoning (e.g. tax benefits, changes in accounting) and at current market prices: the exchange must be informed of such trades beforehand V. Circulation of Price-sensitive Information Information that could affect the price of a security may only be circulated and published if it is to be assumed in good faith that it is actually true. Circulation and publication include actions such as announcing it in the information channels customary to the financial sector and the exchange, in the media in general, in the internet and in bulletins issued by the financial research and analyst departments of securities dealers. Circulating false, incomplete or misleading information on securities or issuers which can affect the price of a security is illegal (market deception)

6 VI. Applying the Principle of Bona Fide Behaviour When trading in securities, the involved parties must comply with the principle of bona fide behaviour. The rules of conduct towards clients (based on art. 11 SESTA Duty to inform, to act diligently and loyally ) are defined in the code of conduct for securities dealers issued by the Swiss Bankers Association. The principle of bona fide behaviour also implies honesty in the market in general The following actions are not compatible with bona fide behaviour: Charging a trading price different from what was actually achieved (price fraud). It is not considered to be price fraud if the securities dealer has assumed a market risk by accepting the order in question or if it has concluded an agreement with the client which justifies a trading price deviating from the one actually contracted (also refer to the code of conduct for securities dealers, issued by the Swiss Bankers Association). Abusing knowledge of existing client orders in order to execute first, simultaneously or immediately afterwards proprietary trading (front/parallel/after-running, also specified in the Swiss Bankers Association s code of conduct for securities dealers) Abusing of unlimited orders in securities for which no bid or ask prices exist. 43 The following securities deals and conduct are allowed: The internal execution of securities deals against own or client holdings (internalisation) is acceptable provided the principle of best-execution is applied. 44 VII. Organisational Requirements Applicable for Securities Dealers A. Confidential Price-sensitive Information The handling of confidential, price-sensitive information must be organised and monitored in such a way that market misuse can be identified and that a detriment of clients can be avoided. The securities dealer must act in such a way that clients maintain confidence in the activities of securities trades and in Switzerland s good reputation as a financial centre. Should, in isolated cases, misuse or discriminations be foreseeable, or if it turns out to be impossible to isolate information in an area of confidentiality, it is imperative to disclose conflicts of interest or to abstain from dealing in the securities in question until the time the confidential price-sensitive information has been published. It is for this purpose that the securities dealer needs to put in place an adequate organisation, continuous education and supervision in line with the size and structure of its business activities

7 B. Chinese Walls / Areas of Confidentiality Chinese walls are a combination of measures to control information flows, and the ensuing avoidance of conflicts of interest or misuse of information. These measures could be of a geographical, staff, functional, organisational or IT nature. They create areas of confidentiality which isolate and control information. The degree of organisation is dependent on the securities dealer s business activities, its size and its structure. In case it is necessary, ad-hoc areas of confidentiality are to be created and the knowledge of confidential, price-sensitive information has to be restricted to a limited number of people on a need-to-know basis. Business units should be separated into fixed areas confidentiality by means of vertical Chinese walls. Horizontal Chinese walls should ensure that no confidential, price-sensitive information flows from executive management and centrally organised control functions into other business units. Such Chinese walls are to be defined in internal policies or implemented ad-hoc as the need arises. Their adherence is to be monitored by a defined function (e.g. the compliance function). This function is also in charge of managing the information flow horizontally and vertically. Chinese walls may be broken through provided there is an important reason. Such exceptions must be documented in a timely manner. Management is ultimately responsible for handling confidential, price-sensitive information and conflicts of interests. Management and the Board of Directors may override the individual areas of confidentiality and Chinese walls C. Non-confidential Transactions Should confidential, price-sensitive information be isolated in an area of confidentiality, trades in securities remain possible in other business units, namely, securities trading in the context of market making or as hedging transactions in the trading book (underlying assets and derivative instruments) and proprietary trading or execution of trades on behalf of clients (also refer to margin no. 15). If, however, an across-business-units conflict of interests arises which affects the securities dealer as a whole, Management or the Board of Directors may prohibit trading in the relevant securities for a specific period of time D. Watch List A watch list contains a securities dealer s confidential, price-sensitive information on an issuer, as well as the persons knowing the confidential information and the period of confidentiality. Adherence to these provisions is to be monitored by a defined function (e.g. the compliance function). 54 E. Restricted List A restricted list informs on all of the embargos or limitations on specific business activities, such as trading with specific securities, transaction bans or publishing restrictions on financial analyses. The responsible unit for the watch list, is also responsible for the restricted list. 55 7

8 F. Monitoring Employee Transactions Internal policies define measures for monitoring employee transactions. Such measures must adequately prevent or identify the misuse of confidential, price-sensitive information for employee transactions. These policies also properly take into consideration bank connections with third parties of the securities dealer s employees and conflicts of interests with the employer. 56 G. Placing Securities at the Time of Issue Participation in the preliminary preparations of an issue of securities may lead to knowledge of confidential, price-sensitive information. In this case, the requirements and duties stated in Section III apply. Moreover, the institution must guarantee that securities are allocated according to objective criteria and in a fair and transparent manner, and that this can be scrutinized and verified. For details it is referred to the Swiss Bankers Association s allocation guidelines for the issuing market H. Financial Analysts Analyst and research departments must be structured in such a way that organisationally, they are separate areas of confidentiality. The Swiss Bankers Association s guidelines to ensure the independence of the financial analysis are applicable. Institutions must furthermore issue additional internal policies on transactions for own account executed by employees active in the financial analysis or research department(s) I. Credit Rating Departments involved in assessing loans or in assigning credit ratings must also be organised independently and as separate areas of confidentiality. The credit department may use information gathered from other departments to assist it in assigning an overall credit rating to a client. Internal policies must cover transactions for own account of employees active in this department J. Duty to Record As per art. 15 para. 1 SESTA and art. 1 SESTO-FINMA and FINMA circular 08/4 Securities journal, any trading in securities must be recorded. In addition this circular requires all relevant regulatory issues to be documented. For market supervision purposes, all external and internal telephone conversations held by employees active in the trading of securities must be recorded. These recordings, as well as all electronic correspondence ( s) of these employees must be retained at least for half a year; should it be necessary for investigative purposes, the unchanged records must be made available to FINMA

9 K. Audit Regulated securities dealers may be subject to having their organisational duties audited in a risk-oriented approach by an audit firm which is authorised to do so as per supervisory law. Should the audit firm detect any breaches of this code of conduct for the market, these are to be reported to FINMA (art. 19 SESTA) and stated in the audit report. 65 L. Transitional Period The organisational duties must be implemented until 30 April Should a securities dealer choose to omit certain organisational duties due to its business activities, size or structure, the audit firm must state its opinion on these circumstances in its audit report. 66 9