07 June 2017
London
Reporter: Mark Dugdale

FCA releases results of dividend arbitrage review


Some UK-based firms engaged in dividend arbitrage may not be identifying the risk posed by contrived or fraudulent trading for the purpose of making illegitimate withholding tax reclaims, according to the Financial Conduct Authority (FCA).

The UK’s FCA published the results of a review of dividend arbitrage practice in the UK this month.

The regulator urged firms using trading activities such as securities lending and derivatives to sidestep withholding tax during dividend season to make sure they have adequate processes in place to assess and monitor transactions.

“Most firms executing transactions with, or on behalf of clients engaged in dividend arbitrage, appear to comply with our requirements,” the FCA said in its June Market Watch newsletter. “However, some firms may not have identified the risk posed by contrived or fraudulent trading for the purpose of making illegitimate withholding tax reclaims.”

“As a result, some firms may not have adequate processes to allow them to assess the purpose for dividend arbitrage trading by prospective clients and/or do not establish or monitor clients’ trading abilities and the true nature of the transactions involved. This could result in firms failing to identify clients who may be using this strategy for inappropriate purposes.”

The FCA looked at the activities of a number of inter-dealer brokers, settlement agents and custodians involved in trading European equities around ex-dividend dates.

Those that were identified as failing to adequately assess and monitor transactions did so in a number circumstances, including the use of back to back securities lending agreements and over-the-counter derivatives instruments to hedge stock trades.

Areas of concern for the FCA also included potential connections and associations between the owners of offshore funds and the firms involved in the custody, settlement and clearing of the stock, as well as a lack of transparency as to both the source and availability of funds supposedly being used to fund the trading and the source of stock needed to fulfil a trade.

The FCA reminded UK-based firms engaged in dividend arbitrage that they need to comply with requirements covering financial crime risk.

“They must also have effective processes for carrying out due diligence on new business proposals, on new clients and for monitoring ongoing business.”

“We also expect firms to have a good understanding of the risks that are relevant to their business, as well as strong controls for mitigating those risks. A firm must have the appropriate management oversight and controls in place to minimise the extent to which it is possible for its business to be used for a purpose connected with financial crime.”

More regulation news
The latest news from Securities Lending Times
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
France raises spectre of European financial transactions tax
15 December 2017 | Paris | Reporter: Jenna Lomax
French President Emmanuel Macron and several ministers have dismissed concerns over the negative effect of an EU financial transactions tax on securities lending revenue
Final leverage ratio rule a boon for CCPs
11 December 2017 | Basel | Reporter: Drew Nicol
The final version of Basel III’s leverage ratio rules are providing an early Christmas present for CCPs due to re-orientation towards RWA over minimum capital requirement
Collateral pains stinging buy side
06 December 2017 | London | Reporter: Jenna Lomax
“Regulation is limiting possibilities for the securities lending market”, according to Habib Motani, an international financial markets lawyer at Clifford Chance
SFTR code of conduct not fit for purpose, says SASLA
05 December 2017 | Johannesburg | Reporter: Drew Nicol
The South African Securities Lending Association has raised serious concerns over the applicability of a proposed code of conduct for securities financing participants in the region
SLR and SCCL changes on the horizon, says BNY Mellon
01 December 2017 | New York | Reporter: Zsuzsa Szabo
Adjustments are expected on the Supplemental Leverage Ratio (SLR) and Single Counterparty Credit Limits (SCCL) in the near future, following industry concerns
EEA members’ supervisory weaknesses exposed in ESMA review
30 November 2017 | Paris | Reporter: Jenna Lomax
ESMA said those NCAs who did not identify good practices, would be consulted by ESMA on how they can make improvements in time for the MiFID II deadline
IHS Markit partners with Regis-TR on SFTR
29 November 2017 | London | Reporter: Jenna Lomax
Regis-TR, the European trade repository, has collaborated with IHS Markit to create a reporting solution for SFTR requirements