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  4. Point in time
    2007-02-12

MAR 3.1 Application

APPLICATION: WHO?

MAR 3.1.1 R

This chapter applies to every firm except:

  1. (1)

    a service company, unless the service company is an ATS operator, in which case, MAR 3.4.10 G and MAR 3.4.10A G apply to the service company in relation to the operation of the ATS;3

  2. (2)

    a non-directive friendly society;

  3. (3)

    a non-directive insurer;

  4. (4)

    a UCITS qualifier.

APPLICATION: WHAT?

MAR 3.1.2 R

This chapter applies to a firm:

  1. (1)

    when it carries on:

    1. (a)

      regulated activities; or

    2. (b)

      related ancillary activities;

  2. (2)

    to the extent that the regulated activity the firm is carrying on is:

    1. (a)

      dealing in investments as principal; or

    2. (b)

      dealing in investments as agent; or

    3. (c)

      acting as an arranger; or

    4. (d)

      giving transaction-specific advice;

  3. (3)

    but only if the activity referred to in (1) and (2) is in or is in respect of an inter-professional investment and is undertaken with or for a market counterparty.

MAR 3.1.2A R

In MAR 3.1.2 R, the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc) is to be disregarded in determining whether dealing in investments as principal (or agreeing to do so) is a regulated activity.2

MAR 3.1.3 R

This chapter does not apply to the carrying on of the following activities:

  1. (1)

    the approval by a firm of a financial promotion; or

  2. (2)

    activities carried on between operators, or between operators and depositories, of the same collective investment scheme (when acting in that capacity); or

  3. (3)

    corporate finance business;4

  4. (4)

    safeguarding and administering investments and agreeing to carry on that regulated activity; or4

  5. (5)

    concluding a distance contract with a retail customer.4

APPLICATION: WHERE?

MAR 3.1.4 R

This chapter applies only with respect to a firm's activities carried on from an establishment maintained by the firm in the United Kingdom.

RIGHTS OF ACTION FOR DAMAGES

MAR 3.1.5 R

A contravention of the rules in MAR 3 does not give rise to a right of action by a private person under section 150 of the Act (and each of the rules in this instrument is specified under section 150(2) of the Act as a provision giving rise to no such right of action).1

MAR 3.2 Purpose

MAR 3.2.1 G

The main objective of this chapter (MAR 3) is the maintenance of confidence in the financial system, although it is also relevant to the FSA's other regulatory objectives under the Act. However, many of its provisions relate to the conduct of bilateral dealings and it seeks to secure good market practice by firms undertaking inter-professional business in three ways:

  1. (1)

    by increasing certainty by explaining how the Principles apply to inter-professional business, whilst acknowledging that what is required to meet the proper standards of conduct for a firm may differ depending on whether or not the firm is dealing with a market counterparty (see PRIN 1.2.1 G(Characteristics of the client));

  2. (2)

    by setting out rules for inter-professional business in cases when it is not appropriate to rely on the Principles alone; and

  3. (3)

    by setting out the FSA's understanding of certain market practices and conventions; drawing this information together in this way will assist certainty, reduce the scope for disputes and make it easier to resolve disputes that do arise.

MAR 3.3 Contents and status of this chapter

MAR 3.3.1 G

MAR 3 Annex 1 G provides guidance on the scope of this chapter.

MAR 3.3.2 G

MAR 3 is not the only chapter of the Handbook that applies to firms doing inter-professional business. Firms should always consider what other parts of the Handbook may apply to them. A table listing the applicable Principles is set out in MAR 3 Annex 2 G. The table also sets out the key provisions of COB and CASS that may also apply to firms doing inter-professional business, but it should not be read as an exhaustive list. Firms should also consider the other provisions of the Handbook, especially but not exclusively2 the Prudential Standards part of the Handbook4.1

3 2 4
MAR 3.3.3 G

MAR 3 Annex 3 G is a statement of what the FSA understands to be generally regarded as good market practice and conventions in certain areas. It is not guidance on rules.

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

MAR 3.4.1 G

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.)

MAR 3.4.2 G

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.

SUITABILITY AND ADVICE

MAR 3.4.3 G

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).

MAR 3.4.4 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.)

COMMUNICATION OF INFORMATION

MAR 3.4.5 G

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.

MAR 3.4.6 G

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.

MAR 3.4.7 G
  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).

MAR 3.4.8 G

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.

MAR 3.4.9 G

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.

CLARITY OF ROLE

MAR 3.4.10 G

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).

MAR 3.4.10A G

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

MAR 3.4.11 G

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.

MAR 3.4.12 G

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.

MARKETING INCENTIVES, INDUCEMENTS AND PAYMENTS IN KIND

MAR 3.4.13 G

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.

MAR 3.4.14 G

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.

2
MAR 3.4.15 G

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).

2
MAR 3.4.16 G

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

MAR 3.5 Transactions at Non-Market Prices

INTRODUCTION

MAR 3.5.1 G

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 3.5.2 G

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.

1
MAR 3.5.3 G

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 3.5.4 R

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 3.5.5 R

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 3.5.6 R

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 3.5.7 E
  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 3.5.8 G

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 3.5.9 G

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 3.5.10 G

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 3.5.11 G

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 3.5.12 G

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 3.5.13 G

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 3.5.14 G

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 3.5.15 G

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 3.5.16 G

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 3.5.17 G

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 3.5.18 G

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 3.5.19 G

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

MAR 3.5.20 G

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 3.5.21 G

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.

MAR 3.6 Taping

MAR 3.6.1 G
  1. (1)

    This section MAR 3.6 provides guidance on the interpretation of the Principles, and in particular Principle 3 (Management and control), as they apply to the capture of certain transactional information and other matters. MAR 3.6 applies only to inter-professional business and there are other requirements in the Handbook which relate to record-keeping requirements.

  2. (2)

    MAR 3.6 also provides additional guidance on the record-keeping requirements of SYSC 3.2.20 R (Records).

MAR 3.6.2 G

MAR 3.6 does not apply:

  1. (1)

    to a firm acting in the course of carrying on the regulated activity of establishing, operating or windingupa collective investment scheme; or

  2. (2)

    to an insurer; or

  3. (3)

    in respect of a transaction if the firm is subject to record-keeping requirements in COB for that transaction.

MAR 3.6.3 G

A firm should implement appropriate systems and controls with a view to ensuring that the material terms of all transactions to which it is a party, and other material information about such transactions, are promptly and accurately recorded in its books or records. The manner in which this information may be recorded include:

  1. (1)

    voice recordings of transactions;

  2. (2)

    voice recordings of oral confirmations;

  3. (3)

    written trading logs or blotters; and

  4. (4)

    automated electronic records.

MAR 3.6.4 G

A firm acting as an arranger (or name-passing broker) need record only those terms that are necessary for the transaction to be identified in its records or that are otherwise relevant to its role as arranger (or name passing broker). For example, it would not normally know the payment and settlement instructions.

MAR 3.6.5 G

A firm should be able to access all records as promptly as necessary. Records should be kept in comprehensible form or should be capable of being promptly so reproduced. The firm should make and implement appropriate procedures to avoid unauthorised alteration of its records.

MAR 3.6.6 G

If the records identified in MAR 3.6.3 G are substituted by written or electronic confirmations produced in accordance with SYSC 3.2.20 R (Records), then that confirmation may be an adequate record of the transaction.

MAR 3.6.7 G

If a transaction is agreed or arranged through an electronic trading, matching and order-routing system, then the records provided by that system may be an adequate record of the transaction.

MAR 3.6.8 G

A firm should keep under review whether, and to what extent, to make and retain voice recordings of its front and back office telephone lines used for negotiating, agreeing, arranging and confirming transactions and for the passing of payment instructions. (See also MAR 3.6.10 G.)

MAR 3.6.9 G

If a firm undertakes oral confirmations of the transactions it executes or brings about, voice recordings of these conversations can constitute an adequate record of that confirmation.

MAR 3.6.10 G

In undertaking a review under MAR 3.6.8 G, it is likely to be a relevant factor that voice recordings:

  1. (1)

    provide an immediate record of all transactions and therefore may assist firms in resolving any disputes;

  2. (2)

    may assist a firm to identify whether any personnel of the firm or of its market counterparty are involved in inappropriate behaviour; market counterparties may take comfort in knowing that their transactions are immediately recorded and that this provides evidence that can be relied upon; and

  3. (3)

    can provide evidence of the rationale for a particular trading strategy or other aspects of inter-professional business and thereby provide protection to the firm.

MAR 3.6.11 G

A firm should make and implement policies on the length of time it keeps tapes. The FSA does not expect tapes to be kept for the full period required by the general record-keeping requirement, except where a firm relies upon voice recordings to comply with record-keeping requirements, in which case it should retain those recordings in accordance with the relevant requirements. One factor in setting that policy may be the use of tapes to assist the firm in resolving any disputes with market counterparties.

MAR 3.7 Firms acting as Wholesale market brokers and those undertaking transactions through them; provisions concerning brokers and arrangers generally

MAR 3.7.1 G

MAR 3.7 provides guidance on the interpretation of the Principles, and in particular Principle 5 (Market conduct), as they apply to certain responsibilities of firms acting as wholesale market brokers and of persons undertaking transactions through them. In particular, it covers the passing of names and differences.

MAR 3.7.2 G

The use of various terms for brokers and arrangers are based on the understanding that name-passing brokers are, in simple terms, what arrangers are called in certain wholesale markets. As such, the terms are virtually interchangeable and in MAR both terms have generally been used for the avoidance of doubt. Similarly, name-passing brokers and "matched principal brokers" are both subsets of wholesale market brokers. The use of the latter term is intended to reduce confusion.

PASSING OF NAMES

MAR 3.7.3 G

A firm acting as a name-passing broker should not prematurely divulge the names of the prospective counterparties to each other, for example before both sides display a serious intention to transact. However, as soon as the material terms of a transaction have been agreed, a firm acting as a name-passing broker should aim to achieve a mutual and immediate exchange of names. When a market counterparty name is unacceptable to another, it is quite proper for a firm acting as a name-passing broker not to divulge by whom the name was refused.

SETTLEMENT OF DIFFERENCES

MAR 3.7.4 R

MAR 3.7.5 R to MAR 3.7.8 G apply:

  1. (1)

    to a firm when it acts as a name-passing broker; and

  2. (2)

    to a firm whether acting as principal or agent, when its transaction is brought about by a firm acting as a name-passing broker.

MAR 3.7.5 R
  1. (1)

    If a firm acting as a name-passing broker compensates a market counterparty for a difference, that difference must be settled in money (which for these purposes includes payment by discounting, reducing or rebating commission).

  2. (2)

    A "difference" means (in MAR 3.7.5 R to MAR 3.7.8 G) any difference between a rate or price quoted by a firm acting as a name-passing broker and the rate or price at which the transaction is ultimately concluded.

MAR 3.7.6 G

When arranging a transaction, a name-passing broker is trying to achieve a mutual and immediate exchange of names, based on firm quotation of prices. Inevitably, for non-electronic arrangers, there will be occasions when the transaction is not completed at the original price (for instance because a firm price has been hit by another counterparty). The name-passing broker is said to have missed the original price when a market counterparty accepts a firm quote at that price, but the name-passing broker is unable to arrange for the deal to be completed at that price.

MAR 3.7.7 G

A firm acting as a name-passing broker should not ordinarily accept liability for differences and should provide its services on the basis that it does not do so. (This is because accepting liability for differences amounts to taking a position legally and economically, and the name-passing broker would not be following MAR 3.4.12 G.) A firm doing business with a name-passing broker should not, in the ordinary course, ask the latter for compensation for differences. However, once a difference has arisen, a firm acting as a name-passing broker may offer to compensate its market counterparty for some or all of the difference to preserve the relationship with the market counterparty concerned or for other legitimate commercial reasons. That compensation should be in accordance with MAR 3.7.5 R.

MAR 3.7.8 G

When a price has been missed, a firm acting as principal or agent should generally complete the transaction at the next available price through the name-passing broker that has missed the original price. To do otherwise can be prejudicial to the smooth operation of the markets. If the firm does not proceed with the transaction, it should first consider whether withdrawing would be likely to affect the market concerned, and should immediately communicate its decision to the name-passing broker. The firm should not decline to enter into the transaction at the new price if it would breach a reasonable expectation on the part of the name-passing broker that it would not do this.

GENERAL PROVISIONS ON WHOLESALE MARKETBROKERS AND ARRANGERS

MAR 3.7.9 G

Any payment for broking or arranging services rendered by a firm, other than on a matched principal basis, should be in money (which for these purposes includes payment by discounting, reducing or rebating commission) unless otherwise agreed in writing between the parties.

MAR 3.7.10 G

A firm acting as a wholesale market broker or arranger should not unfairly favour one market counterparty client over another. Treatment that would otherwise have been unfair is not unfair if the market counterparty concerned has expressly consented to it. The "client" of a wholesale market broker or arranger means (in MAR 3.7.10 G and MAR 3.7.11 G) a person for whom it is providing its services as wholesale market broker or arranger.

MAR 3.7.11 G

A firm should not place an order with a firm acting as a wholesale market broker or arranger if the main purpose is to ascertain either the identity of any client of that firm, or information about transactions into which that client may be interested in entering. For example, a firm that wishes to purchase 1000 bonds should not have a firmarrange for the purchase of 100, in order to discover the identity of a person willing to sell those bonds, and then transact with that other person direct for the other 900.

MAR 3.8 Codes of Practice

MAR 3.8.1 G

The FSA does not endorse individual codes of practice applying to inter-professional business (except for the Takeover Code) that are in place in some markets. It will, however, take into account the differing standards and practices operating in markets when interpreting the Principles as they apply to inter-professional business. Further, non-compliance with those codes, or of the Non-Investment Products Code in respect of certain non-authorisable activities, may raise issues such as the integrity or competence of a firm which are relevant to the threshold conditions (see COND 2.5.6 G (4)).

MAR 3 Annex 1 Guidance relevant to MAR 3

G

1

This chapter, MAR 3, applies to firms in their dealings with market counterparties, as set out in MAR 3.1.2 R. When market counterparties have opted to be treated as intermediate customers under COB 4.1.7 R (Classification of another firm or an overseas financial services institution), this chapter does not apply. The requirements on firms in such circumstances are those set out in COB. MAR 3 does, however, apply to firms in their dealings with intermediate customers who have opted to be treated as market counterparties under COB 4.1.12 R (Large intermediate customer described as a market counterparty).

2

This chapter sets out the requirements upon firms in their dealings with market counterparties. The way a firm is assessed under COB 4.1 (Client classification) has no bearing on its obligations to assess its own clients.

3

The list of activities in MAR 3.1.2 R (Application: What?) is not based on types of permission. It is based on the activities of dealing , arranging and advice on investments . This means, for example, that a firm may be subject to MAR 3 if it purchases securities in the course of:

(1) operating a collective investment scheme; or

(2) acting as a life insurance company; or

(3) acting as agent for a customer;

in making that purchase This is notwithstanding that the operation of a collective investment scheme , acting as a life insurance company and acting as agent for a customer for a private customer are not activities that are covered by this chapter in their own right.

4

MAR 3 does not affect the application provisions of the Principles (see PRIN 3 (Rules about application)). The purpose of the application provisions of MAR 3, as they apply to the guidance on the Principles, is to explain in what situations MAR 3 may be used as guidance for interpreting the Principles . If MAR 3 is silent about how the Principles apply to a particular situation, the Principles still apply.

5

Principles. It is not, in general, specifically tailored for particular types of business, nor is it a comprehensive statement of how the Principles apply to inter-professional business in all situations. The guidance on the Principles in MAR 3 should be read in the light of other requirements that may be applicable in a particular case. For example, this guidance applies to on-exchange business, and does not take into account specific rules of exchanges.

6

The application provisions in MAR 3.1.2 R (Application: What?) mean that corporate finance business will normally be outside the scope of this chapter. However, firms should note that some activities, such as dealing , carried out in connection with corporate finance business, may be subject to this chapter.

7

This chapter does not apply to the approval by firms of a financial promotion (see MAR 3.1.3 R); rules and guidance relating to financial promotions are in COB 3. Most financial promotions by unauthorised persons to a market counterparty are exempt under the Financial Promotion Order , (for example, article 19 (investment professionals)) so approval should not be required. In addition, the application of COB 3 to approval of a financial promotion for communication to a market counterparty is limited (see COB 3.2.4 R (2) and COB 3.2.5 R(1) (Exemptions)).

8

The same transaction may give rise to obligations under this chapter and another sourcebook, such as COB . For example, if a firm purchases an inter-professional investment from a market counterparty on behalf of a customer , this chapter applies to the relationship between the firm and the market counterparty . COB governs the relationship between the firm and the customer .

9

In some cases, a deal carried out abroad by the firm's overseas branch or by another member of the firm's group may be subject to this chapter if the final booking is to the firm's balance sheet in the United Kingdom. In all cases, the question is whether the activity involves a firm carrying on inter-professional business from an establishment maintained by the firm in the United Kingdom. For the purposes of this discussion, booking does not include doing a deal with a counterparty and transferring it to the United Kingdom balance sheet by an intra-group back-to-back transaction. It is about putting the transaction with the market counterparty directly onto the UK balance sheet.

(1) In some cases, the transaction involves the firm and an overseas affiliate. The overseas affiliate negotiates and arranges the deal with the market counterparty abroad. However, the actual contract is between the firm in the United Kingdom and the market counterparty . It is likely that this chapter will apply to the firm . This is because the firm's entry into the contract amounts to dealing and that dealing is done from an establishment maintained by the firm in the United Kingdom.

(2) If the booking is merely an internal accounting exercise, and the transaction has no other United Kingdom connection, it is likely that this chapter will not apply. For example, the transaction may be negotiated and executed by an overseas branch of the firm but booked to the firm'sUnited Kingdom balance sheet. If the booking to the United Kingdom balance sheet is the only involvement of the firm in the United Kingdom , it is likely that this chapter will not apply to the firm . This is because, even though the firm is party to the contract and is carrying out a dealing transaction, all the dealing activity takes place at the foreign branch. A mere bookkeeping entry in the United Kingdom , not involving the counterparty in any way, does not mean that the dealing activity is carried on from an establishment maintained by the firm in the United Kingdom. It is carried on from the overseas branch.

10

The territorial application of this chapter does not modify those of any other part of the Handbook. In particular, firms should note the application of Principle 5 (Market conduct), which applies to activities which have, or might reasonably be regarded as likely to have, a negative effect on confidence in the financial system, wherever they are carried on (see PRIN 3.3.1 R).

11

Nothing in this chapter:

(1) modifies any duty owed by a firm to a private customer or intermediate customer under the provisions of any other part of the Handbook; or

(2) relieves a firm of any other obligation to which it may be subject under the general law; or

(3) should be read as qualifying or modifying the Code of Market Conduct, the Code of Practice for Approved Person or the Statement of Principle.

MAR 3 Annex 2 Principles and key COB provisions

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Rule

Description

Principle 1

A firm must conduct its business with integrity.

Principle 2

A firm must conduct its business with due skill, care and diligence.

Principle 3

A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

Principle 4

A firm must maintain adequate financial resources.

Principle 5

A firm must observe proper standards of market conduct.

Principle 7

A firm must ... communicate information [to its clients] in a way which is ... not misleading.

Principle 10

A firm must arrange adequate protection for clients' assets when it is responsible for them.

Principle 11

A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.

COB 3

Financial promotion (relating to the approval of a financial promotion, see paragraph 7 in MAR 3 Annex 1 G)

COB 2.4

Chinese Walls

COB 4.1

Client classification

COB 7.13

Personal Account Dealing

CASS

Client assets

MAR 3 Annex 3 Good market practice and conventions

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INTRODUCTION

1

This annex, MAR 3 Annex 3, is a statement of what the FSA understands to be generally regarded as good market practice and conventions in certain areas. It is not guidance on rules and is issued under section 157(1)(d) of the Act . This annex applies to all kinds of inter-professional business. It will be evident that much of the content is equally applicable to market counterparties as well as firms.

CONFIDENTIALITY

2

When information is received from a market counterparty under conditions of confidentiality, that confidentiality is likely to be enforceable by the owner of that information. Confidentiality should be respected, subject to regulatory and legal requirements.

3

Firms are reminded that the use of loudspeakers in broking and dealing rooms in close proximity to other lines of communication could result in breaches of confidentiality.

NEGOTIATION OF TRANSACTIONS

4

It is good practice for a firm to agree expressly all the economic terms of a transaction before it commits itself to the transaction. A firm should negotiate the remaining terms in good faith and try to agree them as soon as possible.

5

It is good practice for a firm to regard itself as bound to transact once the rate or price and any other key commercial terms have been agreed (whether orally or in written form), unless the parties explicitly and unambiguously agree to the contrary.

6

Generally, a firm that regularly uses the services of a firm acting as a name-passing broker should indicate to it the market counterparties with which, and the investments in which, it is not prepared to transact. That indication should not be in a form which would damage or lower the standing or reputation of the market counterparty in the estimation of reasonable market counterparties if they knew of it. A firm which is given an indication should treat it as confidential.

FIRMNESS OF QUOTATION

7

It is good practice for a firm to follow market conventions regarding quotation, unless it has specifically agreed otherwise with its market counterparty in advance. It should be clear to a market counterparty ;

(1) whether the quote is firm or not;

(2) whether the quote is subject to any conditions, and, if it is, what they are;

(3) for how long the quote remains firm (in fast moving markets, when practicable); and

(4) whether the quote is firm only for the normal marketable amount (if appropriate, otherwise the firm should state the size of the quote).

8

Express clarification of these matters is not necessary to the extent that the firm quotes in accordance with the relevant market convention or exchange rules (if applicable).

9

When a firm quotes to a market counterparty a firm rate or price (whether through an arranger, or name-passing broker , or directly), it is not good practice for the firm then to withdraw that quote or, if that quote is accepted during the period for which the quote remains firm, to decline to deal at that rate or price. A firm may decline to deal with a market counterparty in these circumstances if it was unaware of its identity when the firm gave the quote and the name turns out to be unacceptable, for example, on the grounds of credit risk.

LIMIT ORDERS

10

Before a firm accepts any limit order from a market counterparty, it is good practice to have made and implemented appropriate:

(1) policies on these orders and in particular the circumstances in which and the terms on which it will accept these orders; and

(2) systems and controls for carrying them out.

11

A limit order means a stop loss order and any other instruction from a market counterparty to execute transactions if rates or prices reach specified levels. These orders may be time limited or may be for an indefinite period.

OUT OF HOURS/OFFICE DEALING

12

It is good practice for firms to issue guidelines to their staff on transactions entered into after normal hours or from outside premises, either by mobile phone or any other equipment. The guidelines should cover:

(1) the type of transactions which may be undertaken in this way;

(2) where and with whom these transactions may be executed;

(3) permitted limits;

(4) how and when these transactions should be booked into and recorded on the front and back office systems; and

(5) how and when these transactions are to be confirmed.

13

When answering machines are used for instant reporting and recording of all off-premises transactions, they should be installed and located in such a way that reported transactions cannot subsequently be erased without senior management approval.

14

The use of mobile phones for business purposes from within the dealing room, except in an emergency, is considered bad practice.

SETTLEMENT ERRORS

15

If a firm becomes aware of a settlement error that benefits it at the cost of a market counterparty , it is good practice to inform the market counterparty promptly and reverse the error.

16

If a firm , acting as a broker , becomes aware that it is holding assets on behalf of a market counterparty because of a settlement error which adversely affects that market counterparty , it is good practice to inform the market counterparty promptly and try to rectify the situation.

CONFIRMATIONS

17

Confirmations provide a useful safeguard against dealing errors and can be a valuable element in the control of the firms inter-professional business and exposures. It is good practice for a firm to make available to, or provide to, the market counterparty written confirmation of the material terms of a transaction between them, as soon as possible after the transaction has been agreed or executed.

18

It is acceptable market practice for the firm to agree with its market counterparty that only one party need send a confirmation. If a firm undertakes this practice to a material extent, it is advisable to identify the legal and other risks involved and address them in the firm's risk control policies.

19

If there is a standard form of confirmation that applies to a transaction a firm enters into, it is good practice to ensure that that form is used, unless there is good reason not to. One example of when there is an applicable standard form confirmation is when the parties enter into the transaction under the terms of a master agreement that provides for an applicable form of confirmation. Another is when it is customary in the market concerned to use a particular form of confirmation for transactions of that kind.

20

In general, it is not good practice for confirmations to be issued by or sent to the individual dealer responsible for the transaction. It is good practice to ensure that the dealer concerned is not responsible for checking confirmations unless there are exceptional circumstances. If the dealer is given that responsibility, it is good practice to subject the process to independent monitoring.

21

In general, it is good practice for a firm which arranges a transaction to try to ensure that the parties agree who is to issue a confirmation.

22

Some transactions are matched through an electronic matching system that does not provide for the issue of confirmations, but instead makes and retains records of transactions itself. In these cases, it may be appropriate for a firm neither to receive nor issue confirmations, provided the system allows for the back offices of users to verify the details of transactions entered into on the system.

23

The statements of good practice in paragraphs 17 to 22 do not apply to on-exchange business.

STANDARD SETTLEMENT INSTRUCTIONS

24

It is good practice for a firm to make and implement appropriate policies on the use of standard settlement instructions (SSIs) to reduce the incidence and size of differences arising from a mistaken settlement of funds. These are especially appropriate when the firm has a relationship with a market counterparty which suggests there will be regular payment of significant amounts.

25

It is good practice to establish SSIs in a secure and verifiable format. A firm acting as an arranger (or name-passing broker) has no responsibility for ensuring that its market counterparty have SSIs in place.

MASTER AGREEMENTS

26

Firms are encouraged to negotiate and execute master agreements. These govern the relationship between the parties and how such a relationship and all transactions under it shall be terminated in the event of one party's default upon a transaction. It is recognised that executed documentation can be and should be used as an efficient risk management tool. Firms should consider the benefits of valid close out netting provisions (see IPRU).

27

If it is the policy of a firm to use master agreements, it is good practice to make and implement policies for what transactions should be subject to the terms of which master agreement and have systems and controls for ensuring compliance with that policy. If a firm has a policy that transactions should be entered into with a market counterparty only after a master agreement has been implemented, it is advisable to have procedures to ensure that any exceptions are agreed at an appropriate level.

COMMISSION/BROKERAGE

28

It is good practice for firms acting as principals to pay due brokerage bills promptly. Overdue payments can seriously disadvantage wholesale market brokers, since overdue payments result, in their treatment by the FSA for regulatory purposes, as an increase in their cost of capital.

DISPUTES

29

In the event of a dispute between a firm and a market counterparty, it is preferable for the parties to seek to resolve the issues themselves. If they cannot reach agreement, they should consider the advantages of using established arbitration or mediation services.