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Financial Conduct Authority Focuses on Dividend Arbitrage

On June 2, the Financial Conduct Authority (FCA) published issue 52 of Market Watch, its market conduct and transaction reporting newsletter. The newsletter focuses on the practice of dividend arbitrage, the intention of which is to place shares in alternative tax jurisdictions around dividend dates, with the aim of minimizing withholding taxes (WHT), or generating WHT reclaims. This may involve several different trading activities, such as trading and lending securities and trading derivatives, including futures and total return swaps, that are designed to hedge movements in the price of the securities over the dividend dates.

The newsletter states that the FCA reviewed the practices of firms executing transactions with or on behalf of clients who engage in dividend arbitrage, and that most comply with the FCA’s requirements. However, the FCA is concerned that some firms may not have undertaken a sufficiently detailed assessment of the purpose and nature of the transactions, raising the risk that firms are involved in contrived transactions which support fraudulent WHT claims. In addition to being potentially criminal in nature, the FCA states that such practices could amount to market abuse due to the potential for false or misleading signals about the supply or demand of a relevant security.

The newsletter reinforces the FCA’s expectations for regulated firms, such as inter-dealer brokers, settlement agents and custodians. Firms are required to establish and maintain effective controls to ensure that they manage these types of risks, especially regarding financial crime risk.

The newsletter is available here.

Beth Tibbals-Benson is the author of this article. 

©2017 Katten Muchin Rosenman LLP

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Our Financial Services Practice advises a broad spectrum of domestic and international fund managers, trading advisors, banks, brokerages and proprietary trading firms in all aspects of exchange-traded and over-the-counter commodities, securities and derivatives transactions. We help clients find business-based solutions and make business-driven decisions that are in compliance with applicable regulatory requirements. Our lawyers have extensive experience in the financial markets and are fully attuned to the need to provide advice quickly and efficiently in light of the time-sensitive and...

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