MAR 3 Annex 3 Good market practice and conventions

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.