• 5 5 Insider Dealing

    • 5-1 Section 92(2) of the FSMR

      (1) Section 92(2) of the FSMR provides that Insider Dealing occurs when:

      "...an Insider deals, or attempts to deal, in a Financial Instrument or Related Instrument on the basis of Inside Information relating to the Financial Instruments or Related Instrument in question."

    • 5-2 What is "Inside Information"

      Definition

      (1) "Inside Information" is defined in section 95(2) as meaning information of a Precise nature which, in relation to Financial Instruments or Related Instruments which are not Commodity Derivatives:
      (a) is not generally available;
      (b) relates, directly or indirectly, to one or more Issuers of the Financial Instruments or to one or more of the Financial Instruments; and
      (c) would, if generally available, be likely to have a significant effect on the price of the Financial Instruments or on the price of Related Instruments.
      (2) "Inside Information" is defined in section 95(3) as information of a Precise nature which, in relation to Financial Instruments or Related Instruments which are Commodity Derivatives:
      (a) is not generally available;
      (b) relates, directly or indirectly, to one or more such derivatives; and
      (c) users of markets on which the derivatives are traded would expect to receive in accordance with any Accepted Market Practices on those markets.
      When is information "Precise"?
      (3) To be "Inside Information", information must be of a Precise nature. Section 95(5) states that information is "Precise" if it:
      (a) indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur; and
      (b) is specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the price of Financial Instruments or Related Instruments.
      (4) The Regulator may also consider that where a protracted process intends to bring about or result in particular circumstances, those circumstances and the intermediate steps of the process which are connected with bringing about such circumstances can also be deemed to be "Precise" information.

      When is information "generally available"?
      (5) Information is only "Inside Information" under the definition in section 95(2) if it is not generally available and has not been made available to the public. The FSMRs do not define what is meant by "generally available", although section 95(8) states that information which can be obtained by research or analysis conducted by, or on behalf of, users of a market is to be regarded as being "generally available" to them.
      (6) The following factors are, in the Regulator's view, likely to indicate that information is "generally available" (and therefore is not Inside Information):
      (a) if the information has been the subject of a disclosure to the market through a Regulatory Announcement Service or otherwise in accordance with the rules of the relevant market or a requirement in a law;
      (b) if the information is contained in records which are open to inspection by the public;
      (c) if the information is otherwise generally available, including through the Internet, or some other publication (including if it is only available on payment of a fee), or is derived from information which has been made public;
      (d) if the information can be obtained by observation by members of the public without infringing rights or obligations of privacy, property or confidentiality; or
      (e) if the information can be obtained by analysing or developing other information which is generally available.

      For example, if a passenger in a vehicle passing a burning factory calls his broker and tells him to sell Shares in the Company that owns the factory, the passenger will be acting on information which is generally available, since it is information which has been obtained by legitimate means through observation of a public event.
      (7) It is not relevant, in the Regulator's view, in relation to information referred to in paragraph 4 that:
      (a) the information is only generally available outside the ADGM; or
      (b) the observation, research or analysis is only achievable by a person with above average financial resources, expertise or competence.
      When will information have a "significant effect on price"
      (8) Information is only "Inside Information" under the definition in section 95(2) if it would be likely to have a significant effect on the price of the Financial Instrument or a Related Instrument. Information would be likely to have a "significant effect on price" if and only if it is information of the kind which a reasonable investor would be likely to use as part of the basis of his investment decisions (see section 95(6)). In the Regulator's view, if information is of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions, then the "significant effect on price" test will be satisfied.

      Trading Information
      (9) Section 95(4) provides that information about a person's pending orders in relation to a Financial Instrument or Related Instrument is also Inside Information. The Regulator considers that information of the following kinds (referred to in this RMC as "Trading Information") relating to pending orders may be Inside Information:
      (a) that Financial Instruments of a particular kind have been or are to be acquired or disposed of, or that their acquisition or disposal is under consideration or the subject of negotiation;
      (b) that Financial Instruments of a particular kind have not been or are not to be acquired or disposed of;
      (c) the quantity of Financial Instruments acquired or disposed of or whose acquisition or disposal is under consideration or the subject of negotiation;
      (d) the price (or range of prices) at which Financial Instruments have been or are to be acquired or disposed of or the price (or range of prices) at which Financial Instruments whose acquisition or disposal is under consideration or the subject of negotiation may be acquired or disposed of; or
      (e) the identity of the persons involved or likely to be involved in any capacity in an acquisition or disposal.
      (10) A person who executes a Client order does not contravene section 92(2) (Insider Dealing) provided he complies with certain conditions (see Rules 5- 7(8) and 5- 7(9) of the RMC).

      Carrying out of own trading intention
      (11) A person will form an intention to deal in a Financial Instrument before doing so. His carrying out of his own intention will not of itself contravene section 92(2) (Insider Dealing).

    • 5-3 Definition Of "Insider"

      (1) The term "Insider" is defined in section 94 as meaning:

      "...any person who has Inside Information:
      (a) as a result of his membership of an administrative, management or supervisory body of an Issuer of Financial Instruments;
      (b) as a result of his holding in the capital of an Issuer of Financial Instruments;
      (c) as a result of having access to the information through the exercise of his employment, profession or duties;
      (d) as a result of his criminal activities; or
      (e) which he has obtained by other means and which he knows, or could reasonably be expected to know, is Inside Information."
      (2) If a person has Inside Information in any of the circumstances set out in section 94(a) to (d) then, in the Regulator's view, it is not necessary to show that the person knew that the information concerned was Inside Information. However, if the person has information in the circumstances set out in section 94(e), then that sub- paragraph requires that the person knew, or could reasonably be expected to know, that the information is Inside Information. For that purpose, a person could reasonably be expected to know, if:
      (a) a normal and reasonable person in the position of the person holding the Inside Information would know or should have known that the person from whom he received such information was an Insider; and
      (b) a normal and reasonable person in his position who has Inside Information would have known it is Inside Information.

    • 5-4 Dealing "On The Basis Of" Inside Information

      Factors to be taken into account "on the basis of"

      (1) To contravene section 92(2), it is necessary that the Insider deals or attempts to deal "on the basis" of Inside Information. In the Regulator's view, if the Inside Information is the reason for, or a material influence on, the decision to deal or attempt to deal then this indicates that the dealing or attempt to deal is "on the basis" of the Inside Information.
      (2) The following factors are, in the Regulator's view, likely to indicate that the dealing is not "on the basis of" Inside Information:
      (a) if the decision to deal or attempt to deal was made before the person possessed the relevant Inside Information;
      (b) if the person concerned is dealing to satisfy a legal or regulatory obligation which came into being before he possessed the relevant Inside Information; or
      (c) if a person is an organisation, if none of the individuals in possession of the Inside Information:
      (i) had any involvement in the decision to deal; or
      (ii) behaved in such a way as to influence, directly or indirectly, the decision to engage in the dealing; or
      (iii) had any contact with those who were involved in the decision to engage in the dealing whereby the information could have been transmitted.

    • 5-5 Attempting To Deal And Dealing In Related Instruments

      Attempting to deal

      (1) Section 92(2) provides that an Insider shall not directly or indirectly "deal or attempt to deal in a Financial Instrument or Related Instrument" on the basis of Inside Information.
      (2) In the Regulator's view, an "attempt to deal" covers circumstances where an Insider takes steps to enter into a transaction but the transaction is not executed. For example, if an Insider places an order with a broker or instructs another person (such as his investment adviser) to place an order with a broker, even though the order is not subsequently executed.

      Related Instruments
      (3) Section 92(2) prohibits an Insider from dealing or attempting to deal in relation to either the Financial Instrument (i.e. to which the Inside Information relates) or a Related Instrument. The definition of a "Related Instrument" is set out at Rule 1(9) of the RMC.

      (4) For example, if an Insider has Inside Information relating to an Issuer, A, of a Financial Instrument, then a "Related Instrument" could include a Derivative relating to Financial Instruments of A or a Financial Instrument of another member of A's Group, if the price or value of that other Financial Instrument depends, in whole or in part, on the price or value of Financial Instruments of A.

    • 5-6 Examples Of Insider Dealing

      (1) The following are general examples of conduct that, in the Regulator's view, may contravene section 92(2) (Insider Dealing):
      (a) a person who deals on the basis of Inside Information which does not amount to Trading Information;
      (b) a person who possesses Inside Information and uses such information to acquire or dispose of, for their own account or for the account of a third party, directly or indirectly, Financial Instruments to which that information relates;
      (c) a person who enters an order and consequent to the order becomes privy to Inside Information, and then amends or cancels the order based on that Inside Information;
      (d) an Officer or Employee of an Issuer becomes aware of Inside Information relating to the Issuer, the Officer or Employee then deals in Financial Instruments of the Issuer on the basis of that information;
      (e) a person who generally obtains an unfair advantage from Inside Information to the detriment of third parties who are unaware of such information, by entering into Financial Instruments in accordance with that information;
      (f) front running - that is, a transaction for a person's own benefit, on the basis of and ahead of an order which he or another person is to carry out with or for another person (where the information concerning the order is Inside Information), which takes advantage of the anticipated impact of the order on the market;
      (g) using Inside Information obtained as a result of a market sounding (i.e. a discussion with a potential investor to gauge his interest in a potential Offering of a Financial Instrument or the price of the potential Offering) to deal in a Financial Instrument;
      (h) in the context of a Takeover, an Offer or potential Offer or entering into a transaction in a Financial Instrument, or in a Related Instrument, on the basis of Inside Information concerning the proposed bid, that provides merely an economic exposure to movements in the price of the target Company's Shares (for example, a Derivative related to the target Company's share price); or
      (i) in the context of a Takeover, a person who acts as an adviser to the Offer or potential Offeror dealing for his own benefit in a Financial Instrument or in a Related Instrument on the basis of information concerning the bid which is Inside Information.
      (2) The following are some more specific examples of conduct that, in the Regulator's view, may contravene section 92(2) (Insider Dealing):
      (a) A is the CEO of a Company (an Authorised Person) that is about to release its semi-annual financial report. The report will disclose an outstanding claim that will have a significant impact on the Company's financial results. A passes this information on to family members who instruct their broker to sell their Shares in the Company. The family members would have contravened section 92(2) (Insider Dealing) and A would have contravened section 92(3) (providing Inside Information) (see Rule 6 of the RMC);
      (b) B, an Employee of an oil and gas Company (an Authorised Person) becomes aware through his employment that the Company is about to enter into a new joint venture agreement with another Company that will potentially be very lucrative for the Company. Before the new joint venture is disclosed to the market, B buys Shares in his employer Company based on his expectation that the price of the Shares will rise significantly once the new joint venture is announced;
      (c) C, an Employee of a firm that is providing advisory services to a Company, D (an Authorised Person), becomes aware of negotiations for a Takeover of D that is likely to be announced to the market imminently. C buys Shares in D based on his expectation that the Takeover will soon be announced;
      (d) D, a dealer on the trading desk of an Authorised Person dealing in Derivatives, accepts a large order from a Client to acquire a long position in futures. Before executing the order, D trades for the firm and on his personal account by taking a long position in those futures, based on his expectation that he will be able to sell them at profit due to the significant price increase that will result from the execution of his Client's order. Both trades would contravene section 92(2) (Insider Dealing); and
      (e) Investment bank E has been in discussions with an Issuer about a potential issue of new Financial Instruments by the Issuer. In order to gauge potential investor interest and the terms of the issue, E raises the issue with a potential investor, F, to see if F would be prepared to commit to purchasing some of the Financial Instruments. F uses this Inside Information to deal in other Related Instruments.

    • 5-7 Defences

      (1) Some general examples of conduct that may be considered by the Regulator as a defence to Market Abuse include:
      (a) the person is participating in a liquidity scheme which is operated by a Recognised Investment Exchange;
      (b) despite possessing the Inside Information, the person has established, implemented and maintained adequate and effective internal arrangements and procedures that effectively ensure that the person engaging in Market Abuse was not in possession of the Inside Information;
      (c) the person establishes that he reasonably believed that the Inside Information had been disclosed to the market in accordance with the FSMR or the Markets Rules;
      (d) the dealing occurred in the legitimate performance of an underwriting agreement for the Financial Instruments or Related Instruments in question;
      (e) the dealing occurred in the legitimate performance of his functions as a liquidator or receiver;
      (f) the dealing is undertaken solely in the course of the legitimate performance of his functions as a market maker;
      (g) the person executes an unsolicited Client order in Financial Instruments or Related Instruments while in possession of Inside Information without contravening section 92(3) (providing Inside Information) or otherwise advising or encouraging the Client in relation to the transaction;
      (h) the dealing is undertaken legitimately and solely in the context of that person's public Takeover bid for the purpose of gaining control of that Authorised Person or a proposed merger with that Authorised Person; or
      (i) the sole purpose of the Authorised Person acquiring its own Shares was to satisfy a legitimate reduction of share capital or to redeem Shares in accordance with the Rules.

      Further guidance setting out the Regulator's views on some, but not all, of these defences is set out below.
      Market making
      (2) Dealing undertaken by a person solely in the course of the legitimate performance of his functions as a market maker on his own account will not contravene section 92(2) (Insider Dealing).
      (3) In the Regulator's view, the following factors are likely to indicate that a person's dealing in a Financial Instrument is in the course of the legitimate performance of his functions as a market maker:
      (a) if the person holds himself out as willing and able to enter into transactions for the sale and purchase of Financial Instruments of that description at prices determined by him generally and continuously rather than in respect of a particular transaction;
      (b) if the dealing is in the course of the provision of the services referred to in (a) or is in order to hedge a risk arising from such a dealing; and
      (c) if Inside Information held by the person or persons who make the decision to deal is limited to Trading Information.
      (4) In the Regulator's view, if the person acted in Contravention of a regulatory requirement or a requirement of the relevant market, that is a factor that indicates that the person's dealing is not in the legitimate performance of his functions as a market maker.

      Other general examples of conduct that may amount to defences to section 92(2) (Insider Dealing) in the Regulator's view include the following:

      Underwriting
      (5) A dealing by a person that occurs in the legitimate performance of an underwriting agreement for the Financial Instruments or Related Instruments in question.
      (6) In the Regulator's view, an underwriting agreement is an agreement under which a party agrees to buy, before issue, a specific quantity of Financial Instruments in an issue of Financial Instruments on a given date at a given price, if no other party has purchased or acquired them.
      (7) In the Regulator's view, if the person acted in Contravention of a relevant regulatory requirement or a requirement of the relevant market, that is a factor that indicates that the person's dealing is not in the legitimate performance of his functions under an underwriting agreement.

      Execution of Client orders
      (8) The execution of an unsolicited Client order in Financial Instruments or Related Instruments while in possession of Inside Information if the person executing the order has not:
      (a) contravened section 92(3) i.e. disclosed Inside Information to the Client or procured the Client to deal in the Financial Instruments or Related Instruments for which the person executing the order has Inside Information (see Rule 6 of the RMC); or
      (b) otherwise advised or encouraged the Client in relation to the transaction.
      (9) In the Regulator's view, the following factors are likely to indicate that the person's dealing is the execution of an unsolicited Client order:
      (a) if the dealing is initiated by the Client;
      (b) if the person has agreed with their Client that it will act in a particular way when carrying out or arranging the carrying out of the order;
      (c) if the person's Behaviour was with a view to facilitating or ensuring the effective carrying out of the order;
      (d) if the person's Behaviour was reasonable by the proper standards of conduct of the market, and proportional to any risk undertaken by that person;
      (e) if the relevant trading by that person on behalf of the Client order either has no impact on the price, or there has been adequate disclosure to the Client that trading will take place without objection from the Client; and
      (f) if the person has complied with any applicable conduct of business obligations relating to the execution of the order for the Client.
      (10) In the Regulator's view, if the Inside Information is not limited to Trading Information, that is a factor which indicates that the person's dealing does not amount to a dutiful execution of an unsolicited Client order.

      Takeovers and mergers
      (11) A dealing undertaken legitimately and solely in the context of a person's public Takeover bid for the purpose of gaining control of the Authorised Person or a proposed merger with the Authorised Person.
      (12) There are two categories of Inside Information potentially relevant to a Takeover or merger:
      (a) information that an Offeror or potential Offeror is going to make, or is considering making, an Offer for the target; and
      (b) information that an Offeror or potential Offeror may obtain through due diligence.
      (13) In determining whether or not the dealing is undertaken legitimately and solely in the context of a Takeover bid or merger, the Regulator is likely to take into account factors such as:
      (a) whether the transactions concerned are in the target Company's Shares;
      (b) whether the transactions concerned are for the sole purpose of gaining control or effecting the merger; and
      (c) whether the person has complied with applicable regulatory requirements relating to the Takeover or merger.
      Chinese walls
      (14) A person may also be regarding as not contravening the Market Abuse provisions by dealing in Financial Instruments if:
      (a) it had in operation at that time an effective information barrier which could reasonably be expected to ensure that the Inside Information was not communicated to the person or persons who made the decision to deal and that no advice with respect to the transaction or agreement was given to that person or any of those persons by an Insider; and
      (b) the information was not communicated and no such advice was given.

      For example, if Inside Information is held behind an effective information barrier, from the individuals who make the decision to deal, the dealing by the person may not contravene section 92(2).
      (15) In the Regulator's view, to rely on this defence, the person must not only have in place information barriers which could reasonably be expected to prevent the communication of the Inside Information, but must also be able to show that the information was not in fact communicated to the person who made the decision to deal.