Stay informed with free updates
Hong Kong authorities are cracking down on the way banks discuss block trades with hedge funds after a criminal case against Segantii Capital Management and founder Simon Sadler spotlighted the practice.
The Securities and Futures Commission, the territory’s financial watchdog, announced new guidelines Thursday covering so-called “market sounding,” a gray area in which banks discuss upcoming or potential block trades with hedge funds to gauge their interest in buying the stock. gauge. stock.
Block trades are privately negotiated sales of a large portion of a company’s stock, which can depress the price. If hedge funds or other investors bet against a company in the belief that a block trade is likely to occur, they can make money if the trade materializes and pushes the stock lower.
“The guidelines are intended to address market integrity issues related to the misuse of confidential information entrusted by a client during market soundings, resulting in an unfair playing field,” said Julia Leung, CEO of the SFC. They should come into force next year.
The SFC’s move comes after it announced a criminal insider trading case against hedge fund Segantii, Sadler and former trader Daniel La Rocca in May. Segantii, once one of the dominant players in bloc trading in Asia, has said it plans to defend itself “vigorously.”
Block trades can be a lucrative corner of the market for banks and hedge funds, but have attracted the attention of regulators, including in the US and UK.
The SFC’s guidelines say that when a bank surveys a hedge fund about its interest in buying shares in a potential block trade, it can only provide details that are so “broad, narrow, vague and anonymised” that the fund cannot identify councils. of the issuer — unless the fund has agreed to treat it as confidential.
It says that if a bank or hedge fund misuses so-called “market-gauging information,” it could violate regulator guidelines, even if what is discussed is not considered price-sensitive or considered inside information. Banks should record market-sounding calls and use authorized communication channels, the report says.
Hedge funds will have to make a “reasonable effort” to find out whether information from a bank counts as market sounding if the bank does not specify it, the guidance said.
The SFC’s guidelines do not have the force of law, but the watchdog said failure to comply could lead to someone considering whether to retain a license or not.
Segantii is in the process of ceasing operations and returning investors’ money in the wake of the lawsuit. The case concerns transactions in retailer Esprit that took place in 2017.
In addition, Morgan Stanley agreed in January to pay $249 million to settle federal investigations into misconduct in block trades. The Securities and Exchange Commission found that Pawan Passi, the former head of the bank’s U.S. equity syndicate, had shared nonpublic information about upcoming block trades with investors.
The SEC imposed a $250,000 civil penalty on Passi and banned him from working in the industry. He admitted wrongdoing and agreed to a deferred prosecution agreement.