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Rating:UK Completes Initial Market Timing Probe Not Rated 4.0 Email Routing List Email & Route  Print Print
Thursday, March 18, 2004

UK Completes Initial Market Timing Probe

Reported by Sean Hanna, Editor in Chief

While investigators in the United States are busy wringing massive settlements out of fund firms -- the dollar figure is $1.6 billion and counting -- the peers across the Atlantic have also found evidence of improper trading. Yet the damages are on an entirely different scale (a much smaller one).

The United Kingdom's Financial Services Authority (FSA), which is roughly equivalent to the SEC in the United States, said Thursday that while it has uncovered evidence of harmful stale price market timing, those trades did not appear to be widespread or costly to fund investors there. Indeed, the FSA initial estimate is that the total cost of the timing trades are likely to be less than 5 million.

FSA Chairman Callum McCarthy announced the investigation into trading in authorized Collective Investment Schemes (CIS) on December 10, 2003. The CIS is equivalent to a Forty Act open-end fund in the United States.

The FSA investigation also found no evidence of late trading in U.K. funds when it looked into that possibility. However, even in the U.S. late trading has been confined to a relatively small number of cases.

"The picture we have uncovered is generally quite an encouraging one. Although there is evidence of market timing having occurred within our authorized funds, looking at all the evidence we have amassed, we can find no sign either that market timing is widespread or that it has been a major source of detriment to long term investors," said FSA Director Michael Foot.

In a statement, FSA officials added that "while some evidence of limited market timing activity was uncovered, the relationships between the UK CIS fund managers concerned and the market timing clients appear to be of a different nature to those uncovered in the US, where there has been evidence of significant financial benefit to fund managers as a result of their relationships."

The FSA investigation looked at 9,620 transactions made by funds that manage an aggregate of 160 billion of the 220 billion invested CIS. Of that trades amount, only 118 eventually required follow up during on-site visits to 21 of the fund managers. The report also noted that the framework of the U.K.'s fund industry apparently helped prevent late trading in CIS. The FSA noted that deals are placed directly with the fund manager before valuation points. It also lauded U.K. trustees for providing important control and oversight.

"We believe that our Principles and Rules provide sufficient tools to enable firms to manage the conflicts of interests posed by market timers. Among these tools are the ability to price underlying assets at a fair value and the ability to refuse to sell units to suspected market timers, as well as a number of measures to reduce dilution and to otherwise increase the cost (and so decrease the attractiveness) of market timing activity," explained Foot.

"We have amassed a considerable amount of evidence which leads us to this broadly reassuring conclusion and in doing so it would not be surprising if we have sensitized fund managers to the risks they run with respect to market timing and to the need for robust controls and active monitoring. But we will also undoubtedly have alerted some potential market timers. Doing nothing more in this area is therefore not an option for us," he added.

The FSA will follow up on the initial investigation be asking fund managers to demonstrate management of conflicts of interest in accordance with the its Principles-based regime. It also plans to push a package of reforms to the regulation of UK funds that were published last year. The amended rules would clarify the measures available to deter market timing; including the use of fair value pricing and the clarification of the scope for declining to deal.

Foot added that the FSA has been particularly encouraged by the willingness of industry participants to embrace fair value pricing and that it is looking to funds "to work up concrete proposals for this."  

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