MAR 3.4 Standards expected of firms when undertaking inter-professional business

This section 3.4 provides guidance on the interpretation of the Principles and in particular Principle 1 (Integrity), Principle 2 (Skill, care and diligence), Principle 5 (Market conduct) and Principle 7 (Communications with clients.)

The Principles, as they apply to inter-professional business, will be interpreted on the basis that market counterparties do not need or expect the level of protection provided to private customers or intermediate customers. In many respects, inter-professional dealings are mutually self-disciplining. Market counterparties have commercial sanctions available if they consider the conduct of someone they conduct business with is unacceptable, and are responsible for their own decisions. These factors are relevant also to the FSA's interpretation of the provisions of this chapter.

The Principles do not require a firm to assess the suitability of a particular transaction for its client once it has established that it is dealing with a market counterparty. For example, the firm is not obliged to ensure that the market counterparty understands the risks involved; nor is it under any duty to provide best execution or other dealing protections (but see MAR 3.4.5 G to MAR 3.4.9 G).

Similarly, a firm is not obliged to give advice to a market counterparty. The mere passing of information does not mean the firm has assumed responsibility for giving advice. Although Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its ''clients", the only requirement of Principle 7 relating to market counterparties is that a firm must communicate information to market counterparties in a way that is not misleading. (See PRIN 3.4.1 R.)

Principle 7 (Communications with clients) requires that a firm's communications with a marketcounterparty should not be misleading. Otherwise, for the reasons explained in MAR 3.4.4 G, Principle 7 does not apply to a firm's communications with market counterparties.

If a firm volunteers information to a market counterparty, but no formal advisory arrangement is agreed, the firm need not advise a market counterparty about the reliability, relevance or importance of that information. Silence on the part of a firm does not result in a breach of Principle 7, unless, in the circumstances, it results in a communication made by a firm being misleading.

1. (1)

   It is for a firm to decide whether it wishes to provide information to a market counterparty. If it does so the firm is not obliged to keep the market counterparty informed of any changes to the information, unless the firm has agreed to do so.

2. (2)

   Because the duties owed by a firm to a market counterparty are limited, it will frequently be the case that there will be no clash between the duties owed by the firm to the market counterparty and the firm's interests. There will in those cases be no requirement on the firm to disclose its interests.

3. (3)

   When a firm does owe a duty to a market counterparty that arises under the general law of contract (see as an example MAR 3.4.8 G) it should manage any conflict of interest. This can be achieved by the operation of internal Chinese Walls (in accordance with (Chinese Walls) COB 2.4). Otherwise, before it transacts, the firm should disclose the nature and extent of any material conflict to the market counterparty.

4. (4)

   This paragraph, MAR 3.4.7 G, is guidance on Principle 1 (Integrity) and Principle 5 (Market conduct).

The following are examples of where there may be responsibilities that potentially give rise to a duty to disclose material conflicts of interest to the market counterparty:

1. (1)

   the firm is acting as agent for the market counterparty;

2. (2)

   the firm has agreed to advise the market counterparty;

3. (3)

   the firm otherwise owes fiduciary duties to the market counterparty.

Thus, a firm acting as an arranger for a market counterparty, when the firm is an affiliated company of the other principal, should disclose that relationship to the market counterparty.

A firm should take reasonable steps to ensure that it is clear to the market counterparty whether it is acting on its own account, as agent, or as arranger before it enters into a transaction. If a firm is acting as a wholesale market broker, it should indicate what type of broker it is, for example name-passing broker or matched principal broker. This paragraph, MAR 3.4.10 G, is guidance on Principle 7 (Communications with clients).

An ATS operator should take reasonable steps to ensure that the respective roles and responsibilities of the ATS operator and the market counterparty in relation to use of the ATS are clear to the market counterparty.1

If a firm has agreed with a market counterparty to act in one capacity in a transaction, it should not then act in any other capacity in that transaction without the consent of that market counterparty. For example, if a firm bids to transact on an agency basis, it should not, without consent, execute any part of the trade against its own book.

It is not consistent with acting solely as an arranger (or name-passing broker) to take positions, even fleetingly, or act on a matched principal basis in the course of that transaction.

MAR 3.4.14 G and MAR 3.4.16 G provide guidance on the interpretation of the Principles and in particular Principle 1 (Integrity), Principle 3 (Management and control) and Principle 5 (Market conduct) as they apply to marketing incentives, inducements and payments in kind.

A firm should take reasonable steps to ensure that it, or any person acting on its behalf, does not offer, give, solicit or accept an inducement if it is likely to conflict to a material extent with any duty which a recipient firm owes to another person. Inducement can include entertainment and soft commissions.

If a firm gives an inducement and the recipient, although a market counterparty, is acting on behalf of customers, the firm may be subject to the provisions of COB 2.2 (Inducements and soft commission).

A firm should make and implement appropriate systems, controls and policies consistent with MAR 3.4.14 G.