Saturday, April 12, 2014

FCA Brings First Enforcement Action for Manipulation of U.K. Government Bonds

The U.K. Financial Conduct Authority has banned a bond trader from the industry and fined him £662,700 for deliberately manipulating a UK government bond. This is the FCA’s first enforcement action for attempted or actual manipulation of the government bond market. The FCA described the bond trader’s actions as "particularly egregious", falling far below the standards of integrity expected of FCA approved-persons. The investigation found this was the action of one trader on one day, and there is no evidence of collusion with traders in other firms. The bond trader agreed to settle at an early stage of the investigation, thereby qualifying for a 30 percent discount. Without this discount, the FCA would have imposed a fine of £946,800. The FCA found that the bond trader intended to sell his holding, worth £1.2 billion, to the Bank of England for an artificially high price during quantitative easing operations. His conduct was a clear case of market manipulation, said the FCA, designed to secure the price of the relevant bonds at an abnormal or artificial level. The FCA further found that the trader deliberately traded in an aggressive style when purchasing the bond, which gave a false or misleading impression as to the price of the bond and secured the price of the bond at an abnormal or artificial level. This was not trading for a legitimate reason or in accordance with accepted market practices. Indeed, the FCA found that the trading in the bond constituted market abuse in that it was behavior consisting of effecting transactions or orders to trade, otherwise than for legitimate reasons and in conformity with accepted market practices, which gave a false or misleading impression as to the price of the bond and secured its price at an abnormal or artificial level within the meaning of Sections 118(5)(a) and (b) of the Financial Services and Markets Act of 2000. Tracey McDermott, the FCA Director of Enforcement, said that the bond trader’s abuse took advantage of a policy designed to boost the economy with no regard for the potential consequences for other market participants and, ultimately, for tax payers. Fair dealing is at the heart of market integrity, she emphasized, and this enforcement action sends a clear message about how seriously the FCA views attempts to manipulate the market.