FCA flexing its muscles with ARCM short selling penalty
26 October 2020 London
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The UK Financial Conduct Authority’s (FCA) first-of-its-kind penalty against Asia Research and Capital Management (ARCM) for short selling violations represents a shot across the bow for regulated entities that may be struggling to juggle various reporting requirements.
The Hong Kong-based asset management firm found itself on the wrong side of the EU’s Short Selling Regulation (SSR) when it failed to report hundreds of equity swaps over the past two years that gave it a significant net short position to hedge against its investment in Premier Oil.
Last week, the FCA handed ARCM a fine of £873,118 — the regulator's first enforcement related to SSR — for its reporting failings, which included a 30 percent discount under its executive settlement procedures for the fund’s cooperation with the investigation.
The enforcement action is now being viewed as a statement of intent by market observers that the regulator will be taking a hard stance against violations, regardless of intent.
ARCM claimed it was unaware that derivatives were included in the SSR’s reporting requirements as it rarely interacted with EU markets. It also rectified the matter following the discovery of its error and self-reported to the FCA; as well as cooperating with the subsequent inquiry.
However, UK law firm Sidley highlights in a research note that despite the fund’s cooperation during the period of the COVID-19 global pandemic, the FCA nonetheless treated ARCM’s delay in notifying it of the potential breach until a resolution was identified as an aggravating factor.
“Although ARCM is not directly regulated by the FCA, the FCA nonetheless still expects to be made aware of anything it might reasonably require notice (this is encapsulated as Principle 11 of the FCA’s Principles for Businesses in relation to FCA-authorised firms),” explain Sidley partners in the note.
“The FCA expected to have been made aware of ARCM’s potential issues as soon as ARCM became aware of them, rather than only once the matter had been resolved.”
A spokesperson for the regulator further notes that the scale of the fine is significant given it is accepted there was no attempt to deceive regulators or the market and the transactions in question were a hedge, rather than a directional short.
“This fine relates directly to the firm’s failure to disclose its position,” the spokesperson tells SLT. “That makes this a substantial fine, given there was no profit, which reflects how seriously we take this type of misconduct.”
To further illustrate this, the FCA’s enforcement action against ARCM was immediately followed by news of its participation in a joint action with its US counterpart to penalise Goldman Sachs just under $3 billion for bribery charges related to the 1Malaysia Development Berhad scandal.
The bank was also offered a 30 percent reduction in the FCA’s fine, which would have been just under £70 million.
This serves to underscore the regulator’s message to the market that it aims to be harsh but fair with firms that break the rules but hold their hands up, self report their error and cooperate.
The extent that this is true is widely expected to be tested when the FCA finally releases a report of its investigation into more than a dozen firms named as part of the cum-ex scandal that has engulfed Europe in recent years.
In January, the FCA said it would be revealing its findings “imminently” but that is now understood to mean by the end of the year.
The Hong Kong-based asset management firm found itself on the wrong side of the EU’s Short Selling Regulation (SSR) when it failed to report hundreds of equity swaps over the past two years that gave it a significant net short position to hedge against its investment in Premier Oil.
Last week, the FCA handed ARCM a fine of £873,118 — the regulator's first enforcement related to SSR — for its reporting failings, which included a 30 percent discount under its executive settlement procedures for the fund’s cooperation with the investigation.
The enforcement action is now being viewed as a statement of intent by market observers that the regulator will be taking a hard stance against violations, regardless of intent.
ARCM claimed it was unaware that derivatives were included in the SSR’s reporting requirements as it rarely interacted with EU markets. It also rectified the matter following the discovery of its error and self-reported to the FCA; as well as cooperating with the subsequent inquiry.
However, UK law firm Sidley highlights in a research note that despite the fund’s cooperation during the period of the COVID-19 global pandemic, the FCA nonetheless treated ARCM’s delay in notifying it of the potential breach until a resolution was identified as an aggravating factor.
“Although ARCM is not directly regulated by the FCA, the FCA nonetheless still expects to be made aware of anything it might reasonably require notice (this is encapsulated as Principle 11 of the FCA’s Principles for Businesses in relation to FCA-authorised firms),” explain Sidley partners in the note.
“The FCA expected to have been made aware of ARCM’s potential issues as soon as ARCM became aware of them, rather than only once the matter had been resolved.”
A spokesperson for the regulator further notes that the scale of the fine is significant given it is accepted there was no attempt to deceive regulators or the market and the transactions in question were a hedge, rather than a directional short.
“This fine relates directly to the firm’s failure to disclose its position,” the spokesperson tells SLT. “That makes this a substantial fine, given there was no profit, which reflects how seriously we take this type of misconduct.”
To further illustrate this, the FCA’s enforcement action against ARCM was immediately followed by news of its participation in a joint action with its US counterpart to penalise Goldman Sachs just under $3 billion for bribery charges related to the 1Malaysia Development Berhad scandal.
The bank was also offered a 30 percent reduction in the FCA’s fine, which would have been just under £70 million.
This serves to underscore the regulator’s message to the market that it aims to be harsh but fair with firms that break the rules but hold their hands up, self report their error and cooperate.
The extent that this is true is widely expected to be tested when the FCA finally releases a report of its investigation into more than a dozen firms named as part of the cum-ex scandal that has engulfed Europe in recent years.
In January, the FCA said it would be revealing its findings “imminently” but that is now understood to mean by the end of the year.
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