MAR 2 Annex 3 Frequently asked questions on the price stabilising rules

Application

Q1

What does the sentence in MAR 2.1.4 G "Other offers that may be regarded as public are offers to a section of the public, placements that are not essentially private and distributions" mean? If, for example, a public offer of shares is made in another jurisdiction and a private placement of GDRs is made in the United Kingdom, how could that placement of GDRs be "...not essentially private"?

The policy intends to exclude block trades of securities already in issue, not to limit genuine offers for the purposes of capital raising. The guidance given in the MAR 2 sets this out. There is no universally accepted definition of "public offer", nor is it possible or desirable to give exact guidance on how many investors would be required to make an offer "public". It is clear from MAR 2.1.3 R (5) that the public announcement element is critical; stabilisation of placements is only allowed after they are announced. If firms have concerns about a particular issue structure, they may wish to approach us for individual guidance.

Q2

The rules state that the stabilisation safe harbour is available for offers of £15 million or more. Are there circumstances when the safe harbour would be available for offers smaller than £15 million? First, if the overallotment option raised the value above £15 million, would stabilisation be permitted? Secondly, if there are two offers of relevant securities, one of which is below £15 million, can they be combined for stabilisation purposes?

MAR 2.1.3 R (4) sets the limit at £15 million, and this replicates the limit under the Financial Services Act 1986. This refers to the amount to be raised and available for offer. MAR 2.1.3 R and MAR 2.4.2 R (1) state that an overallotment relates to securities that are not among those offered and so are not included in the £15 million limit. So the offer itself, distinct from the overallotment option, should indicate the value and the overallotment is clearly not included in this amount.

If there is more than one offer of the same relevant or associated securities they will only be able to be combined for stabilisation purposes (that is, treated as a single offer) if one of the offers is for more than £15 million and if they are issued simultaneously or almost simultaneously. In these circumstances, all of the securities will be able to be supported by price stabilising action , provided that this is undertaken pursuant to the price stabilising rules in the case of all the securities subject to the offer (including all required disclosures). Firms should seek individual guidance on the ability to combine offers that are made almost simultaneously and the applicable stabilising period for each of the offers.

Record keeping: Territorial application

Q3

The territorial application at MAR 2.1.6 R (2) is for a firm's business when "carried on from an establishment in the United Kingdom". Under MAR 2.2.4 G the safe harbour is available only if proper records are kept. The record-keeping requirement is a general rule, applicable only to authorised firms. Where does this leave passported firms operating out of, for example, Paris? Do they have to follow the record-keeping rules in MAR 2.7?

MAR 2.2.4 G only imposes the record-keeping requirement in MAR 2.3.2 G on those stabilising managers that are obliged to keep those records. MAR 2.3.2 R (3) makes it clear that only those persons to which MAR 2.7 applies have to meet the register requirements in MAR 2.7. The rules in MAR 2.7 (and the rules in MAR 2.6) are general rules made under section 138 of the Act. So, only a firm carrying on business from an establishment in the United Kingdom has to meet the requirements in the rules in MAR 2.6 and MAR 2.7 (see MAR 2.1.6 R (2)). An incoming EEA firm must comply with these rules where this activity is undertaken in the United Kingdom, but if the activity is undertaken in its Home State, local record keeping rules apply. An incoming EEA firm that is carrying on stabilising activity, but only from an establishment abroad, does not have to meet the requirements in MAR 2.7 to get the safe harbour defences referred to in MAR 2.1.2 G (see MAR 2.1.8 G). So MAR 2.2.4 R (2) and MAR 2.3.2 R (3) are not only about whether the person concerned is authorised, but also whether, in the circumstances, the person is obliged to comply with the rule.

Please note that, in this FAQ, when we refer to general rules we are referring to those rules made under section 138 of the Act. The rules in MAR 2.1 to MAR 2.5 are price stabilising rules made under section 144 of the Act (Price stabilising rules).

Stabilising managers and agents

Q4

The rules allow a single stabilising manager. How does this approach relate to agents?

There must be one person that has the sole responsibility for ensuring compliance with the United Kingdomprice stabilising rules ("the rules"). This person is referred to as the stabilising manager. The stabilising manager can delegate activities to an agent or agents, including agents in other jurisdictions. However, the stabilising manager must still maintain overall responsibility for managing and co-ordinating the stabilisation.

This requirement stems from:

(a) the definition of stabilising manager as "the single person responsible for stabilising action under MAR 2"; and

(b) MAR 2.6.4 R, which requires each bid to be made or transaction effected by the stabilising manager himself or a person appointed on specified terms to act as an agent for the stabilising manager.

However, the rules do not prohibit different managers for different jurisdictions. We are aware, for example, that local stabilising rules in some overseas jurisdictions may require a local manager or that local expertise may be required in meeting those local rules. For an offer in an overseas jurisdiction, there is no requirement for an overseas manager to follow the rules unless he wants to obtain the benefit of the safe harbour defences referred to in MAR 2.1.2 G. In such a case, there must be compliance with MAR 2.1 to MAR 2.5, or with MAR 2.8. Further, if the overseas manager wants to use an agent in the United Kingdom , he should ensure that one person is identified as the stabilising manager for the purposes of the rules. That stabilising manager will take responsibility for compliance with MAR 2.6.4 R, and so will take responsibility for the actions of any agents also undertaking stabilisation in the United Kingdom . If the stabilising manager is a firm (that is, an authorised person ) the agent in the United Kingdom will not be able to benefit from the safe harbour if he makes a bid or effects a transaction during stabilising action unless he is appointed on terms complying with MAR 2.6.4 R. (Note that in this scenario we envisage that the stabilising manager will be a firm or employed by a firm (see MAR 2.6.2 R), but if he is not, we suggest that individual guidance is sought.)

Q5

The rules appear to impose a greater responsibility on the stabilising manager for agents' actions than those known to the normal laws of agency. If institutions cover themselves by introducing indemnity statements into contracts, would this mean the policy would be ineffective?

We intend to ensure that responsibilities are clear but avoid setting specific rules in this area. In setting this policy, we envisaged that a contractual arrangement would govern the relationship between principal and agent (explicitly stating the limits of the agent). The contractual relationship between the stabilising manager and his agent could specify that the authority of the agent was limited to actions complying with the rules. However, the contract would also include the term outlined in MAR 2.6.4 R (2)(b). This would make the stabilising manager as responsible to others for the acts or omissions of the agent as if they had been done by the stabilising manager . If the agent were to breach the rules then, even if it is acting outside the authority of the stabilising manager, the stabilising manager would be responsible to others for those actions. However, applying MAR 2.6.4 R means that if the agent does, for example, breach the price limits, the stabilising manager will not automatically lose the safe harbour and be guilty of an offence to which the rules relate. The questions of whether the safe harbour has been lost and whether there has been such an offence, raise different issues. We would need to consider, for example, the steps taken by the stabilising manager in seeking to ensure that the agent did comply with the rules. Our policy here is not defeated by contractual arrangements resulting in the agent indemnifying the stabilising manager.

It is also relevant that MAR 2.6.4 R applies only to a stabilising manager which is a firm (that is, an authorised person ) operating from an establishment in the United Kingdom . If the contract fails to include the required term, there could be disciplinary consequences for the firm, though breach of MAR 2.6.4 R (2)(b) does not result in civil liability in its own right (see MAR 2.1.9 R).

Q6

MAR 2.6.5 R prohibits stabilising managers from entering into principal trades in the relevant securities with their agent. Does the FSA mean to prohibit, for example, cases where the manager and the agent act together to short sell as part of ancillary stabilising action, but where the agent is more successful in the selling, and where the stabilising manager then covers the agent's short position? The rule suggests that this cannot now be done. Is this the intention?

There are a number of issues to consider here.

Any stabilising or ancillary action taken by the stabilising manager or his agent must be taken with a view to supporting the market price of the relevant securities (MAR 2.2.3 R and MAR 2.4.2 R). By their nature, pre-arranged transactions between a principal and agent will not usually be taken with this view in mind. When drafting the rule, we wanted to prohibit the situation where, for example, an agent opened a short position to enable his principal to offload a net long position at less of a loss than would otherwise be the case.

In the specific example referred to in the question above, we would not consider the pre-agreed covering of a short position as prohibited behaviour where:

(a) it comes within the permitted range of stabilising action and is taken with a view to supporting the market price of the relevant securities; and

(b) it involves the agent effectively conducting transactions for the principal's book.

The FSA is aware that the application of MAR 2.6.5 R (1) may raise issues for participants in the debt markets. The FSA is currently considering the issue and we anticipate amending this rule in the near future. In the meantime, we suggest that firms approach the FSA for individual guidance or a waiver.

It is also worth remembering that MAR 2.6.5 R is a general rule (see MAR 2.1.8 G). As such, MAR 2.6.5 R is not relevant for the defences outlined in MAR 2.1.2 G, so the transaction itself will not cause a firm to lose the safe harbour.

Q7

The price stabilising rules prohibit entering into transactions with agents during the stabilising period (MAR 2.6.5 R (1)). For a large firm, it would be difficult to suspend all dealings with agents as they operate on several different levels and have numerous relationships. This would severely limit market activity. Can this be avoided by using Chinese walls?

We introduced this policy to avoid a person manipulating the price through dealings between the principal and its agent. This could arise, for example, if the agent were to sell at a price higher than the price at which another holder of the stock would be able to sell. The thrust of the policy behind the rules is to prevent activities inconsistent with one of the underlying concepts, which is support for the market price. This policy could be defeated if non-arms-length dealing between principal and agent were part of the process.

However, we do not intend that the policy should limit normal market making activities. To separate actions that are collusive from these normal market making activities, it is acceptable to the FSA for a person to use Chinese walls to maintain a separation of its activities as stabilising manager and its activities as market maker. MAR 2.6.5 R (2) states that the prohibition in MAR 2.6.5 R (1) does not apply where the stabilising manager could not have reasonably been expected to know the identity of the counterparty. The use of Chinese walls, to the extent that they will help keep the identity of one party from the other, will in our view enable the market maker to conduct its normal activities with its counterparties. It must be clear, however, that the Chinese wall is operated in line with the normal procedures in COB 2.4.4 R. (This must also be the case for the agent if the agent is an authorised person. This may be more problematic if the agent is a small entity and if there is limited clarity of role in the relationship between the stabilising manager and market maker.)

The firm should ensure that it reviews its actions case by case to ensure that it is not engaging in market abuse and, where necessary, approach the FSA for individual guidance. Where the stabilising manager is limited to using agents that are affiliates of the stabilising manager, it should apply to us for individual guidance on a case by case basis.

Please note that this rule would usually only affect a limited number of transactions. The rules only apply for a limited set of conditions, that is, for dealings in relevant and associated securities during the stabilising period.

Depositary receipts

Q8

What is the policy reason for 'uniformity' of depositary receipts ("DRs") as set out in the definitions, especially concerning numerical uniformity?

We introduced the principle of uniformity to prevent stabilising of DRs that are complex products or which are in the form of an index, that is, those that are non-equivalent instruments. The definition of DR in article 80 of the Regulated Activities Order (which is one of the group of securities specified in MAR 2.1.3 R), excludes receipts conferring rights for two or more investments issued by different persons. (There is a further definition in Schedule 2 to the Criminal Justice Act 1993, for the insider dealing provisions, which defines a DR as a certificate or record issued by or on behalf of someone who holds any relevant securities of a particular issue.) Given these definitions, the standard operation of MAR 2.2.3 R is that a DR can, where it is a relevant security (that is, it is issued as part of the offer), be treated as in the definition of the Regulated Activities Order. The rules do not prohibit stabilising DRs of a different size or denomination to the securities they represent. These are still mutually interchangeable and uniform with the underlying security, and fall within the scope of the rules.

However, where a DR is not issued as part of the offer the definition in the Glossary of an associated security (that it is "...in all material respects uniform with the relevant security in terms of value, size and duration") applies. So, where an associated security is to be stabilised, it should not differ from the relevant security to any material extent. In our view, a DR that is a multiple of a relevant security is an associated security because it is still the same size in all material respects, as it is based on a security that is the same size. However, a DR that is a multiple of a security that is not the same size as a relevant security is not an associated security.

Price limits

Q9

The pricing limits have a ceiling at the issue price, but MAR 2.4.4 R allows ancillary action (under MAR 2.4.2 R) which is not subject to the price limits. MAR 2.4.2 R (2) allows for the closing out or liquidation of any position established under MAR 2.4.2 R (1) by buying relevant or associated securities outside of the pricing rules. However, most of this ancillary action is likely in practice to take place in the grey market and most stabilising managers would be expected to obtain a greenshoe. In effect, any further action would be to close out the short, so circumventing the price limits. Is this correct? The only cases where the limits would apply would be in cases where (i) a short has not been established (that is, no overallotment) or (ii) where the short is closed out, but there is a need to stabilise further.

A reminder of this issue was outlined in our Market Watch Newsletter No. 1 (September 2001) on our website at www.fsa.gov.uk/marketconduct. Any short positions opened by a stabilising manager with the purpose of "circumventing" the price limits in MAR 2.5 would take the stabilising manager out of the stabilising action safe harbour. A short position established by short sales or an overallotment must be established "with a view to supporting the price of the relevant securities by action under MAR 2.2.3 R". Action can only be taken under MAR 2.2.3 R if certain conditions are met, including the price limits in MAR 2.5 (see MAR 2.2.2 G (4)). A stabilising manager can only open a short position if it does so with a view to buying relevant securities in line with the price limits in MAR 2.5. In other words, at the time the short position or overallotment position is taken, it must be taken by the stabilising manager with a view to taking action under MAR 2.2.3 R (that is, purchasing securities) in line with the price limit rules.

If, at the time the short position is set up, the real intention is to circumvent the price limits, then that position is not being set up "with a view to supporting the price" of the relevant securities. Instead, the position is being taken with a view to avoiding the price limits.

With shorts created for price support, if it then transpires that it is not possible to cover the position in line with the price limit rules, the stabilising manager is able, without breaching the rules, to cover the position outside the price limits. There will also be economic pressures here given the costs of covering a short. Not applying the price limits to the covering purchases brings the covering of short positions within the safe harbour. So, the issue is: when does buying by a stabilising manager contrary to the price limit rules indicate that the stabilising manager did not take the position with a view to buying in line with the price limits? This would be a question of fact, to be decided in the circumstances of each case. However, an indication might be where the overallotment was so large in relation to the greenshoe facility available that it would make it probable that there might have to be closing out above the price limits.1