The Pre-Announcement Whisper
You are a senior dealer on the sterling credit desk of a mid-sized UK bank and a member of the bank's new-issue committee. At 15:40 on Tuesday a relationship manager forwards you an email from a fund manager stating that a FTSE 250 issuer is "sounding out investors" for a £350 million seven-year bond "next week" and asking whether your bank can "indicate a level". You have not been wall-crossed, no non-disclosure agreement has been signed, and the relationship manager is not part of the deal team. At 15:55 a proprietary trader on your floor asks you to quote a three-month credit default swap on the same issuer, £40 million notional, adding that he "heard something in the market this morning". Your bank's policies require information barriers, pre-clearance for personal account dealing, and prompt escalation of any suspected market abuse. The issuer's bonds are actively traded and the CDS spread has been stable at 85bp for a month.
1. Applying the inside-information test, how should you treat the forwarded email, and what immediate actions are required before 16:00?
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Test the information against the three limbs. Precise: the email identifies a specific issuer, instrument, size (£350m) and tenor (seven years), and a timing ("next week"). Even though the mandate is not confirmed, a forthcoming issue is a sufficiently defined event. Non-public: it comes from a fund manager sounding out investors, not from an announcement. Price-sensitive: a £350m new issue is likely to move the issuer's curve and its CDS. The information therefore passes the test; the prudent conclusion is that it is inside information, and uncertainty about timing does not make it safe to trade.
Immediate actions. Do not reply to the fund manager, do not forward the email to anyone except Compliance, and do not discuss the issuer with the proprietary trader or on the desk. Telephone the market-abuse team now, preserve the email and a written note of the 15:55 conversation, and ask Compliance to place the issuer on the restricted list pending review. If the bank is later mandated on the deal, formal wall-crossing and a personal attestation should follow. Note that the relationship manager's forwarding of the email is itself a potential breach of confidence and of the information-barrier policy; that should be recorded, not corrected informally by you.
2. What is the correct response to the proprietary trader's request for a CDS quote, and to his comment that he "heard something"?
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Decline to quote and do not discuss the issuer. A quote is not a neutral act: pricing a £40m three-month CDS while in possession of the information, or even declining in a way that signals why, risks communicating inside information and could amount to tipping. The trader's remark that he "heard something" is an unverified rumour, but it raises a separate red flag: if he acts on it, or if he has already traded, that may be market abuse.
The correct handling is to tell him only that you are not able to quote, then escalate immediately to Compliance with a written note of what he said, when, and what positions he holds. Compliance should review his communications and any trades in the name over the preceding days and decide whether a suspicious transaction and order report is required. Do not confront him, do not ask him who told him, and do not warn him that a review is under way. Preserve the CDS screen history and your own chat and email records.
3. What governance failures does the episode reveal, and what should Compliance do next?
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Three failures stand out. First, the email reached a dealer through a relationship manager rather than through the new-issue deal team, which defeats the wall-crossing process. Second, the bank received unsolicited confidential information about a third party with no NDA and no instruction on how to handle it. Third, the new-issue committee membership sits alongside a trading role without an obvious restricted-list control linking the two.
Compliance should: preserve all records and interview the relationship manager and the dealer separately; check whether the fund manager's email was itself a breach of a duty of confidence and whether the bank should decline further contact on the matter; review the new-issue procedures so that pre-mandate soundings are logged and the deal team controls the flow; and consider whether the issuer should be told, if the bank is mandated. It should also test whether other staff on the new-issue committee have traded the name, and deliver targeted training on receiving unsolicited MNPI. Any sanction should be proportionate and documented, and the log should record the decision and its rationale so the bank can demonstrate a robust control environment to its regulator.