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REC 2.6 General safeguards for investors

REC 2.6.1UKRP

Schedule to the Recognition Requirements Regulations, Paragraph 4(1)

The [UK RIE] must ensure that business conducted by means of itsfacilitiesis conducted in an orderly manner and so as to afford proper protection to investors.1
REC 2.6.2UKRP

Schedule to the Recognition Requirements Regulations, Paragraph 19(1)

The [UK RCH] must ensure that itsfacilitiesare such as to afford proper protection to investors.1
REC 2.6.3UK

In determining whether:

  1. (1)

    business conducted by means of a UK RIE'sfacilities is conducted so; or

  2. (2)

    a UK RCH's facilities are such;

as to afford proper protection to investors, the FSA may, in addition to the matters dealt with in REC 2.7 to REC 2.12, have regard to all the arrangements made by the UK recognised body concerning the operation of its facilities.

REC 2.6.4UK

The FSA may also have regard to the extent to which the UK recognised body's rules, procedures and the arrangements for monitoring and overseeing the use of its facilities:

  1. (1)

    include appropriate measures to prevent the use of its facilities for abusive or improper purposes;

  2. (2)

    provide appropriate safeguards for investors against fraud or misconduct, recklessness, negligence or incompetence by users of its facilities;

  3. (3)

    provide appropriate information to enable users of its facilities to monitor their use of the facilities;

  4. (4)

    include appropriate arrangements to enable users of its facilities to raise queries about any use of those facilities which they are reported to have made;

  5. (5)

    include appropriate arrangements to enable users of its facilities to comply with any relevant regulatory or legal requirements; and

  6. (6)

    include appropriate arrangements to reduce the risk that those facilities will be used in ways which are incompatible with relevant regulatory or legal requirements;

and in this paragraph "appropriate" should be taken to mean appropriate having regard to the nature and scale of the UK recognised body'sfacilities, the types of persons who will use the facilities and the use which they will make of those facilities.

Orderly markets

REC 2.6.5G

In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FSA may have regard to the extent to which the UK RIE's rules and procedures:

  1. (1)

    are consistent with the Code of Market Conduct (see MAR 1);

  2. (2)

    prohibit abusive trading practices or the deliberate reporting or publication of false information about trades; and

  3. (3)

    prohibit or prevent:

    1. (a)

      trades in which a party is improperly indemnified against losses;

    2. (b)

      trades intended to create a false appearance of trading activity ("wash trades");

    3. (c)

      cross trades executed for improper purposes;

    4. (d)

      improperly prearranged or prenegotiated trades;

    5. (e)

      trades intended to assist or conceal any potentially identifiable trading abuse ("accommodation trades"); and

    6. (f)

      trades which one party does not intend to close out or settle.

REC 2.6.6UKRP

In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FSA may have regard to whether the UK RIE's arrangements and practices:

  1. (1)

    enable members and clients for whom they act to obtain the best price available at the time for their size and type of trade;

  2. (2)

    ensure:

    1. (a)

      sufficient pre-trade transparency in the UK RIE's markets taking account of the practices in those markets and the trading systems used; and

    2. (b)

      sufficient post-trade transparency in the UK RIE's markets taking into account the nature and liquidity of the specified investments traded, market conditions and the scale of transactions, the need (where appropriate) to preserve anonymity for members and clients for whom they act, and the needs of different market participants for timely price information;

  3. (3)

    include procedures which enable the UK RIE to influence trading conditions or suspend trading promptly when necessary to maintain an orderly market; and

  4. (4)

    if they include arrangements to support or encourage liquidity:

    1. (a)

      are transparent;

    2. (b)

      are not likely to encourage any person to enter into transactions other than for proper trading purposes (which may include hedging, investment, speculation, price determination, arbitrage and filling orders from any client for whom he acts);

    3. (c)

      are consistent with a reliable, undistorted price-formation process; and

    4. (d)

      alleviate dealing or other identified costs associated with trading on the UK RIE's markets and do not subsidise a market position of a user of its facilities or subsidise any margin payments (or the provision of collateral) which such a user would have to make.

REC 2.6.7EURP

The FSA accepts that block trading, upstairs trading and other types of specialist transactions (such as the "exchange of futures for physicals" in certain commodity markets) can have a legitimate commercial rationale consistent with the orderly conduct of business and proper protection for investors. They may therefore be permitted under the rules of a UK RIE, subject to any necessary safeguards, where appropriate.