THE Financial Services Authority is concerned that insider dealers may be gravitating towards the credit markets, where scrutiny is less intense, the markets are more opaque and banks are less likely to report suspicious transactions.
Banks and brokers that have failed in recent months to report many or any suspect deals by their clients are being targeted in a crackdown by the FSA, beginning this autumn.
A burgeoning array of new debt-related derivative instruments has made it easier for City cheats to profit from inside information without trading in the more closely policed equity markets. In particular, some involved in the market report big spikes in the prices of credit default swaps (see box) ahead of sensitive announcements, suggesting that some City professionals may be exploiting inside information.
Sally Dewar, director of markets for the FSA, told City firms recently that she had become “increasingly concerned by the risk generated by institutions exploiting the information they legitimately receive for illegitimate purposes or engaging in other unacceptable behaviour”.
There have been wide differences in the number of suspect deals reported to the FSA by investment banks since the new whistle-blowing regime, the Market Abuse Directive, came into force a year ago.
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Many trades in credit markets fall into a grey area and investment banks are reluctant to offend lucrative clients such as hedge funds by reporting them to the FSA unless there is persuasive evidence of abuse.
Yet the FSA, which receives about 200 suspicious transaction reports a year, is compiling a list of firms that never seem to find anything amiss.
Ms Dewar wrote: “We can see firms who have not reported any suspicious transactions where their peers have and . . . we will be following up with these firms to ensure they have the necessary systems and procedures in place.”
Both regulators and banks accept that identifying and nailing insider dealers in the credit markets is much more difficult than in equity and equity derivative markets. “Credit market participants appear less likely to report suspicious behaviour to the appropriate authority,” the FSA said.
The FSA is also concerned that insider dealers may be escaping detection because banks legally handing out confidential information to clients are failing to keep accurate records of approved insiders.
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Some clients, including hedge funds, gain inside information, known in the compliance world as MNPI (Material Non-Public Information) when, for example, banks pre-market bond issues to select potential customers to gauge investor appetite. But if they do not buy the bonds or debt, they may not appear on the approved list of insiders and are likely to escape being checked if there is a leak.
Cassandra Williams, manager of the market conduct division at the FSA, told The Times: “The opportunities for insider dealing are not just confined to equity markets.”
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