UK Finds Little Market Timing

March 18, 2004 (—The British Financial Services Authority (FSA) has not found any evidence of illegal, late trading but has uncovered some evidence of market timing in UK authorized collective investment schemes (CIS), Dow Jones reported.

FSA reported that its investigation revealed some market timing, but because most occurrences were short-lived as a result of quick-acting fund managers, the timing that did take place does not appear to have been of great harm to long term investors.   However, FSA has asked that fund managers calculate the effects, which are expected to be less than GBP5 million, of market timing so that there can be some compensation made to the affected funds.

In the future the FSA will continue its examination of trustee oversight, making sure that it can help firms to control the conflicts of interests posed by market timers.  

The investigation led FSA to see that the problem sometimes lies with order aggregators who place combined deals for several customers, which may potentially conceal market timing activity.      The market timing that was uncovered revealed a somewhat different relationship between the involved UK CIS fund managers and the market timing clients from those in the US, where there has been significant financial benefit to fund managers as a result of the market timing relationships, according to Dow Jones.   

While there was minimal market timing found, there was no evidence found of late trading in the CIS, which the FSA partly attributes to regulations dictating the control required by the trustees of UK funds, and regulations that require deals to be put directly with the fund manager before valuation.      However, Dow Jones reports that the FSA will encourage managers of unit linked funds which are not covered by the more detailed CIS regime to adopt the tools in the CIS regime, which the FSA thinks will allow those funds to prevent market timing.  

The FSA investigation included 9,620 transactions, with only 118 requiring follow up during on site visits.

Last year, a package of reforms that dealt with fund regulation in the UK was published.      CP 185 included amendments to clarify what measures should be used to deter market timing, including fair value pricing and clarification of the scope for declining to deal.