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MAR 3.5 Transactions at Non-Market Prices

INTRODUCTION

MAR 3.5.1G

A firm should not enter into a transaction which it knows to be improper, or which it ought reasonably to have realised is improper, whether on its own account or for a third party. Firms often do not have the information to be able to assess the reasons why a market counterparty is entering into a transaction, but from past experience, a good indication that the purpose may be improper is if the transaction is undertaken at a price other than at the prevailing market price. Failure to use prevailing rates or prices may result in a firm participating, whether deliberately or unknowingly, in the concealment of a profit or loss, or in the perpetration of a fraud. There may, however, be legitimate reasons for entering into transactions at non-market prices, and MAR 3.5.4 R requires that a firm take reasonable steps to check this.

MAR 3.5.2G

Firms acting as arrangers (or name-passing brokers) have a more limited role in the transaction and MAR 3.5.4 R and MAR 3.5.7 E do not apply to them. Under Principle 1 (Integrity) and Principle 5 (Market conduct), a firm acting as arranger (or name-passing broker) should not conclude the arrangement if there is information from which it ought reasonably to conclude that the transaction is improper, whether or not it is at a non-market price. Notwithstanding their limited role, firms acting as arrangers (or name-passing brokers) as well as other firms should also comply with obligations upon them arising from ML.

MAR 3.5.3G

The requirements upon firms when conducting designated investment business with or for a customer are set out in COB 7.15 (Non-market-price transactions).

NON-MARKET-PRICE TRANSACTIONS

MAR 3.5.4R

Except where MAR 3.5.6 R applies, a firm must not enter into, as agent or principal, a non-market-price transaction under which it deals in an inter-professional investment unless it has taken reasonable steps to ascertain that the transaction is not being entered into by the market counterparty for an improper purpose (see also MAR 3.5.7 E).

MAR 3.5.5R

A firm must make and retain, for a period of three years, a record of the steps it has taken under MAR 3.5.4 R, in relation to each transaction.

MAR 3.5.6R

MAR 3.5.4 R does not apply to a non-market-price transaction if it is subject to the rules of an RIE.

MAR 3.5.7E
  1. (1)

    To take reasonable steps as required by MAR 3.5.4 R a firm should:

    1. (a)

      have in place procedures to enable it to identify non-market-price transactions (for guidance on this, see MAR 3.5.8 G to MAR 3.5.12 G);

    2. (b)

      have in place, and approved by an individual holding a senior position with the firm, a policy and procedure for the review (to take place before the firm commits itself to that transaction) of the non-market-price transaction:

      1. (i)

        by an individual holding a senior position with the firm; or

      2. (ii)

        in accordance with (2);

      and should follow that policy and procedure (for guidance on this, see MAR 3.5.17 G to MAR 3.5.21 G);

    3. (c)

      ensure the review considers the reasons for the transaction (for guidance on this, see MAR 3.5.13 G to MAR 3.5.16 G); and

    4. (d)

      check whether it has been put on notice that the transaction is for an improper purpose.

  2. (2)

    A firm may have the review in (1)(b) carried out by an individual working for the firm who does not hold a senior position in the firm if:

    1. (a)

      the policy and procedures established under (1) cover such reviews;

    2. (b)

      that policy sets out the categories of transaction that may be reviewed in this way;

    3. (c)

      the transaction falls into one of those categories;

    4. (d)

      the firm can demonstrate that these categories of transactions are routinely entered into by firms and are so defined that there is a high probability that transactions coming within them will be for proper purposes;

    5. (e)

      the factors defining those categories do not in substance involve any judgment of whether any purpose is improper;

    6. (f)

      the policy provides for matters to be referred to a senior level in appropriate circumstances;

    7. (g)

      those approving the policy are satisfied that all those who are eligible under the policy to participate in the review have the appropriate level of skills;

    8. (h)

      the policy has due regard to segregation of responsibilities; and

    9. (i)

      the firm keeps under review whether the categories of transaction established under (2) do have the result described in (2)(d).

  3. (3)

    Compliance with (1) and, to the degree relevant, (2) may be relied on as tending to show compliance with MAR 3.5.4 R.

  4. (4)

    Contravention of (1) or, to the degree relevant, (2) may be relied on as tending to show contravention of MAR 3.5.4 R.

WHETHER A TRANSACTION IS TO BE CONSIDERED A NON-MARKET-PRICE TRANSACTION

MAR 3.5.8G

A non-market-price transaction is a transaction where:

  1. (1)

    the dealing rate or price paid by the firm or its client differs from the prevailing market rate or price to a material extent; or

  2. (2)

    the firm or its client otherwise gives materially more or less in value than it receives in return.

MAR 3.5.9G

Certain types of transactions or structured transactions are undertaken at non-market rates or prices, but are not necessarily considered to be non-market-price transactions. Examples are:

  1. (1)

    a transaction with more than one component, where the individual components are entered into at non-market rates or prices, so long as the sum of the whole transaction produces an overall market rate or price, for example:

    1. (a)

      asset swaps, where the underlying asset is sometimes sold at a non-market price; the fixed cash flows from the asset are then passed back to the seller, also at a non-market rate; where neither the asset trade nor the swap is at a market rate, the overall transaction can be considered to be at the market price where the combination of the two components delivers this result; and

    2. (b)

      other types of swaps, where one or both legs is not on the forward curve (showing implied forward rates or prices), for example when up-front or final payments are involved;

  2. (2)

    the purchase and sale of out of the money options. The fact that the strike price is away from the market price is not in itself sufficient to give rise to a non-market-price transaction; other factors, such as the level of premium, must also be considered;

  3. (3)

    in tax-based transactions, a tax gain or liability should be taken into account in order to determine whether it is a non-market-price transaction.

MAR 3.5.10G

Certain circumstances may result in a transaction being undertaken at a price other than the market price, for example:

  1. (1)

    the transaction is not for a marketable amount; or

  2. (2)

    an order has been carried out over a period of time; or

  3. (3)

    a transaction is executed outside normal market hours; or

  4. (4)

    a transaction is executed in illiquid markets; or

  5. (5)

    a transaction has a non-standard settlement period;

and these circumstances may be relevant in assessing whether the transaction constitutes a non-market-price transaction.

MAR 3.5.11G

The question of whether a transaction is a non-market-price transaction is to be judged as at the time it is effected and not with hindsight.

MAR 3.5.12G

The variation or rolling over of an existing transaction should be regarded as a new transaction for the purposes of MAR 3.5.4 R.

WHETHER A TRANSACTION IS TO BE CONSIDERED TO BE FOR IMPROPER PURPOSES

MAR 3.5.13G

Examples of improper purposes for transactions (see MAR 3.5.4 R) include:

  1. (1)

    the perpetration of a fraud;

  2. (2)

    the disguising or concealment of the nature of a transaction or of profits, losses or cashflows;

  3. (3)

    transactions which amount to market abuse;

  4. (4)

    vulnerable transactions under the Insolvency Act 1986; and

  5. (5)

    "window dressing", in particular around the year end, to disguise the true financial position of the person concerned.

MAR 3.5.14G

A transaction may be for one or more of the purposes stated in MAR 3.5.13 G yet still not be a non-market-price transaction. MAR 3.5 should not be taken as qualifying in any way obligations on firms, however these arise, regarding these transactions.

MAR 3.5.15G

When a non-marketpricetransaction has more than one component, the assessment of whether or not the transaction is improper should be made by reference to the transaction as a whole. Although the judgment is formed with reference to the whole transaction, a firm may conclude that the rationale for one component would cause it to be in breach of MAR 3.5.4 R.

MAR 3.5.16G

A transfer between a firm and its nominee or an intra-group transfer for risk management purposes may not be at a market price, but will often be for proper purposes. Where that is so, the firm may take part in it. However a firm should establish, and act in accordance with, a policy dealing with these transfers, and other intra-group non-market-price transactions, and be able to demonstrate that it has considered the consequences of participating in them.

PROCEDURES TO BE TAKEN BY A FIRM

MAR 3.5.17G

The procedures a firm has in place to identify non-market-price transactions should be appropriate for the types of transaction in question, bearing in mind MAR 3.5.8 G to MAR 3.5.12 G.

MAR 3.5.18G

When a firm proposes to enter into a non-market-price transaction, the personnel considering the transaction should:

  1. (1)

    consider the justification and rationale of the other parties to the proposed transaction and whether the decision to enter into it was taken by the parties concerned at a senior level, and not by an individual trader or treasurer; and

  2. (2)

    (if the transaction is approved) be satisfied that all the material terms of the non-market-price transaction (so far as they affect the firm) have been agreed before the transaction is entered into and that they are promptly recorded in accordance with MAR 3.5.7E; material terms are likely to include the amounts each counterparty is to pay and receive and whether any amounts are to be netted against or offset against any amounts due and owing under a separate transaction.

MAR 3.5.19G

The degree of seniority referred to in MAR 3.5.7 E (1)(b) may depend on the nature of the transaction.

MAR 3.5.20G

A firm operating an electronic matching system should consider implementing appropriate systems to identify potential non-market-price transactions. In these circumstances, it may be appropriate for such identification, and appropriate resulting action, to occur after the transaction has taken place.

MAR 3.5.21G

A firm may take reasonable steps to ascertain its market counterparty's rationale for entering into the transaction, as set out in MAR 3.5.18 G, but still be unable to find this out. It is up to the firm, having regard to the circumstances, to decide whether it is appropriate to enter into the transaction. One relevant circumstance is whether or not the market counterparty is another firm, in which case the firm is entitled to assume that the other firm is acting properly, in the absence of any further information to the contrary.