REC 2.12 Proper markets and disclosure of information (UK RIEs only)

In determining whether there is a proper market in a specified investment, the FSA may have regard to:

1. (1)

   whether there is a sufficient range of persons already holding the specified investment (or, where relevant, the underlying asset) or interested in dealing in it to bring about adequate forces of supply and demand;

2. (2)

   the extent to which there are any limitations on the persons who may hold or deal in the specified investment, or the amounts of the specified investment which may be held;

3. (3)

   whether there are effective means to take and make delivery of the specified investment (or to settle the contract concerned) and, if appropriate, of any underlying asset; and

4. (4)

   whether there is adequate information in the public domain to enable market participants to make a reasonably informed judgment about the value of the specified investment and the risks associated with it.

There may be a proper market in a specified investment although:

1. (1)

   different market participants have access to different information or receive information at different times;

2. (2)

   there is more than one exchange on which the specified investment has been admitted to trading, or the specified investment is traded both on-exchange and over the counter;

3. (3)

   the specified investment is a derivative of an underlying asset or other thing in which there is not a proper market;

4. (4)

   the specified investment is an underlying asset of a derivative in which there is not a proper market for reasons not connected with the underlying asset; and

5. (5)

   the market in the specified investment is illiquid, that is to say that it may not be possible to acquire, or to dispose of, a significant quantity of the specified investment without a substantial movement in its price.

The FSA considers that there will usually be a proper market in the following types of specified investment:

1. (1)

   a securityadmitted to trading by an arrangement between the UK RIE and the issuer which requires the issuer to comply with admission requirements and continuing obligations, if:

   1. (a)

      in the case of a security which is not listed, the UK RIE requires the issuer to comply with initial and continuing obligations which are appropriate for securities which may be offered to the public in the United Kingdom; or

   2. (b)

      it is a requirement under that arrangement that the security is listed in an EEA State;

   and the UK RIE has adequate procedures governing the suspension or removal of the security from trading;

2. (2)

   a securityadmitted to trading other than by an arrangement with the issuer, if:

   1. (a)

      the security is admitted to, and has not been removed or suspended from, the official list in an EEA State; or

   2. (b)

      the security is admitted to trading, and has not been removed or is not suspended from trading, by an investment exchange or similar organisation, which imposes and enforces requirements on the issuer comparable to those required for admission of like securities to an official list in the EEA;

   and the UK RIE has adequate arrangements to suspend or remove the security from trading, including arrangements to obtain relevant information;

3. (3)

   a derivative, if:

   1. (a)

      the terms of the derivative are sufficiently precise to provide for an understandable relationship between the price of the derivative and the price of the underlying asset or factor;

   2. (b)

      the UK RIE has adequate procedures for obtaining information relevant for determining whether or not to suspend or discontinue trading in that derivative;

   3. (c)

      there is sufficient information available to persons considering whether to enter into that derivative to make a reasonably informed judgment about its value and the risks associated with it; and

   4. (d)

      the additional tests in REC 2.12.7 G or REC 2.12.8 G are met.

Where the derivative relates to an underlying asset, the additional tests are:

1. (1)

   there are adequate settlement and delivery procedures for the underlying asset;

2. (2)

   there is sufficient relevant information available to persons considering whether to enter into the derivative for them to make a reasonably informed judgment about the value of the underlying asset; and

3. (3)

   the UK RIE has adequate arrangements to obtain relevant information about the underlying asset.

Where the derivative is a contract for differences whose terms provide for obligations to be calculated or incurred by reference to fluctuations in an index or other factor, the additional test is that the parties to that derivative have access to information about that index or other factor and about fluctuations in that index or other factor.

The general test set out in REC 2.12.4 G may be satisfied in different ways. The FSA does not prescribe any particular requirements which specified investments which are to be admitted to trading should satisfy or any particular principles which UK RIEs should follow in making decisions about the admission to trading of specified investments (or about whether such specified investments should subsequently be removed or suspended from trading). Each UK RIE should be able to show the FSA that its policies and practices in the admission to trading of specified investments ensure that the dealing will be limited to specified investments in which there is a proper market.

The existence of a proper market in a specified investment does not automatically imply that it is a suitable specified investment for any particular investor, or class of investors.

In determining whether appropriate arrangements have been made to make relevant information available to persons engaged in dealing in specified investments admitted to trading on the UK RIE, the FSA may have regard to:

1. (1)

   the extent to which members and clients for whom they act are able to obtain information about those specified investments, either through accepted channels for dissemination of information or through other regularly and widely accessible communication media, to make a reasonably informed judgment about the value and the risks associated with those specified investments in a timely fashion;

2. (2)

   what restrictions, if any, there are on the dissemination of relevant information to the UK RIE's members and clients for whom they act; and

3. (3)

   whether relevant information is or can be kept to restricted groups of persons in such a way as to facilitate or encourage dealing in contravention of the Code of Market Conduct (see MAR 1).

UK RIEs do not need to maintain their own arrangements for disseminating news or information about specified investments (or underlying assets) to their members where they have made adequate arrangements for other persons to do so on their behalf or there are other effective and reliable arrangements for this purpose.

The recognition requirement set out in REC 2.12.3 D applies to all UK RIEs which admit relevant securities (as defined in that recognition requirement) whether or not they have an arrangement with the issuer of those relevant securities.