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Market Watch 75: Proactive Monitoring in Market Soundings: A Crucial Imperative 

On 31 October 2023, the FCA published Market Watch 75 expressing concern about instances of possible market abuse in connection with market soundings under MAR. 

Market soundings play a pivotal role in financial markets, aiding issuers and investors in gauging interest and facilitating price discovery for transactions. These interactions are instrumental to issuers and firms in maintaining market integrity by managing the risks of potential insider trading. The UK Market Abuse Regulation (MAR) market soundings regime formalizes the process of disclosing inside information, ensuring transparency and safeguarding against misuse. However, recent observations have highlighted the need for proactive monitoring to prevent potential violations and maintain market fairness. 

Challenges in Market Soundings 

Market soundings involve a series of critical steps:

  1. Assessing the disclosure of inside information
  2. Standardizing communication procedures with Market Sounding Recipients (MSRs)
  3. Obtaining MSR consent
  4. Prohibiting MSR use of this information for trading
  5. MSRs independently assesings the presence of inside information in the market sounding, incorporating additional knowledge they possess.

The European Securities and Markets Authority (ESMA) Market Sounding Guidelines outline the responsibilities of MSRs in handling inside information, emphasizing independent assessment and controlled information flow. Recent instances have revealed a significant challenge: MSRs trading financial instruments before inside information is disclosed. Despite initial communications not revealing the specific details of the proposed transaction, MSRs often use available information to identify these details, potentially leading to unfair advantages.

Importance of Proactive Monitoring 

The significance of proactive monitoring becomes evident in these scenarios. MSRs who can identify financial instruments before consenting to receive inside information may inadvertently engage in insider trading, as the market sounding regime only protects against unlawful disclosure by the Disclosing Market Participants (DMPs).

Here are some reasons why proactive monitoring is beneficial in this instance:

  1. Risk Mitigation: Proactive monitoring allows financial institutions to identify and assess potential risks before they materialize. It can help detect unusual trading patterns along with their eComms and market sounding (pre-registration) list that may indicate insider trading or unauthorized use of inside information by MSRs.
  2. Compliance Enforcement: Proactive monitoring provides the necessary data and evidence to enforce compliance with regulatory requirements. This is essential for maintaining market integrity and ensuring that the rules are followed.
  3. Early Detection: Early detection of potential issues allows for timely intervention. If MSRs are identified as having the information they shouldn’t have before the official disclosure, firms can take steps to prevent unauthorized trading or disclosure of inside information.
  4. Regulatory Oversight: Regulatory authorities often mandate proactive monitoring as part of their oversight responsibilities. By conducting such monitoring, they fulfill their mandate to protect market integrity and investor interests.

The increasing emphasis on stopping misconduct before it escalates reflects a critical shift driven by regulators, and financial institutions are now recognizing the benefits of proactive surveillance. In order to meet these needs, organizations are increasingly turning to AI-powered solutions to align with these evolving requirements against emerging threats. 


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