Upper Tribunal Tax and Chancery Chamber

UT (Tax & Chancery) UT-2022-000134 UT-2022-000135 UT-2022-000137 - [2025] UKUT 00214 (TCC)

Fecha: 31-Ene-2025

Abusive scheme would not have benefitted the Traders

Abusive scheme would not have benefitted the Traders

691.

The Traders submitted that the Authority has not identified any financial benefit to the Traders, with Mr Jaffey submitting that the Authority has no pleaded case on motive.

692.

The Authority’s Decision Notices refer in their “Summary of Reasons” to:

(1)

the Desk’s role being to provide prices and liquidity in EGBs to clients and that the Traders would often hedge their trades with clients through Futures on Eurex, and

(2)

the abusive trading strategy alleged is described as having the objective of assisting the execution of a smaller genuine order they wished to trade on the opposite side of the order book. Other market participants would likely have altered their trading strategies as a result of the false and misleading signals given by the Large Orders, eg when a Trader placed a large buy order it gave a false signal that there was a material buyer in the market and other buyers, anticipating that the market was likely to move higher, would likely act with more urgency in order to secure the execution of their buy orders.

693.

The Decision Notices set out the “Facts and Matters” and made the following allegations under “Trader remuneration and performance of the Desk”:

(1)

The Desk often lost money as a result of trading with clients but it was strategically important for MHI to offer EGBs to clients of MHI’s other services. Senior management had increased the hit ratio for the Desk, requiring the Traders to execute a higher proportion of client orders than previously.

(2)

In order for the Desk to be successful, and to achieve the increased hit ratio, it was necessary to respond to clients quickly and with as competitive a price as possible. Through the use of the abusive trading strategy, the Traders aimed to respond to clients’ RFQs more quickly, and make more competitive prices with increased certainty, in order to increase their hit ratios.

(3)

Whilst the Traders were remunerated based on a range of weighted factors, the performance of the Desk was a significant factor when calculating the Traders’ bonuses.

694.

In the context of setting out the Authority’s determination of the financial penalty, the Decision Notices recorded that the Authority had not identified any financial benefit that the Traders derived directly from the market abuse, but does also note that the aim of executing genuine orders more efficiently and managing better the risk on their book as a result of the placement of misleading orders would have improved the performance of the Desk which was a factor taken into account in determining the bonuses they were to receive.

695.

In its Amended Statements of Case the Authority sets out the “Facts and Matters relied on by the Authority”, and they include:

(1)

To secure the order in response to an RFQ, it is generally necessary to ensure that the price provided is sufficiently competitive. The price will also be determined by a number of other factors, including the trader’s assessment of the risk posed to his book. In general, the risk is minimised by hedging as soon as possible after the trade because this minimised possible exposure to moving prices.

(2)

In April 2016 the target hit ratio of the Desk had been increased to 15%, requiring the Desk to execute a higher proportion of client orders than they needed to previously. The hit ratio was likely to increase if RFQs were responded to quickly and with as competitive a price as possible.

(3)

The Traders’ remuneration package from MHI consisted of fixed remuneration (a salary) and variable remuneration (a discretionary bonus). Discretionary bonuses were dependent on achievement of individual objectives, measured formally via a Balanced Scorecard Appraisal, which gave scores across a range of weighted factors according to objectives set each April.

(4)

The abusive strategy involved the placing of misleading orders which the Traders did not intend to trade but instead intended or hoped to facilitate the execution of other genuine orders on the opposite side of the order book.

696.

In setting out the alleged breaches of s118 FSMA 2000 and Article 15 of the Market Abuse Regulation, the Authority stated that the purpose of placing the misleading orders was to facilitate the execution of genuine orders at a more advantageous price, or on a more timely basis, than would otherwise have been achieved but for their having misled other market participants by the misleading orders.

697.

The Tribunal considers that the Authority has throughout set out the reasons which it relies upon in support of its allegations that the Traders committed market abuse and, within this, the alleged benefits to the Desk and to the Traders of pursuing an abusive strategy. This is a separate issue to whether these alleged benefits, or even any identified benefits, would be sufficient to form a reason for the Traders to commit market abuse.

698.

We have found:

(1)

Market making in EGBs is very competitive. Most market makers, having traded in the cash bond market and who needed to hedge their risk, would hedge with Futures and would do so swiftly in order to manage their exposure to market movements. The Desk would generally make less than one tick per lot on cash trades.

(2)

The Small Orders were the trades in Futures that the Traders were actually transacting and needed to transact. They were important to the Desk.

(3)

Mr Urra was an experienced trader, well-regarded in the industry and had recently been promoted to Head of European Rates Trading at MHI. He was recognised as being a successful trader, and Mr Heiberg was satisfied with his personal performance. He had received a total bonus award of £325,000 for 2015/2016.

(4)

Mr Lopez was an experienced trader and was considered to be a highly responsible individual with a strong moral compass by Mr Heiberg. He was still in his probationary period at MHI during the Relevant Period.

(5)

Mr Sheth was the junior trader on the desk and had recently been promoted from Analyst to Associate Trader.

(6)

The 15% hit ratio introduced by Mr Heiberg was an increase on what the Desk as a whole had previously been achieving but Mr Heiberg considered that Mr Urra was already meeting this individually, it was an informal target and was not introduced as one of the defined performance objectives for any of the Traders.

(7)

The Desk had a target of £8.5m for 2016/2017 and had not met its target for the two preceding financial years.

(8)

The Traders had personal targets. Whilst we accepted that Mr Sheth had not known his specific target during the Relevant Period, we found that Mr Sheth knew that he was expected to generate an overall profit.

(9)

The Traders’ remuneration included a discretionary bonus, the amount of which would be based on performance measured by reference to performance objectives which took into account several factors including their own P&L or revenue generation (and, for Mr Urra, the performance of the Desk).

(10)

The Traders’ proposed bonus awards for 2016/2017 were £400,000 for Mr Urra, £50,000 for Mr Lopez and £100,000 for Mr Sheth. These were ultimately withheld by MHI.

699.

The Authority is not required to establish that the Traders would have obtained significant (or any) benefit from the alleged market abuse, but in circumstances where a large part of the Authority’s case relies on inferences it submits should be drawn from the activity, we consider that it is relevant to consider why the Traders might have been motivated to commit market abuse. This is particularly so in circumstances where the abusive scheme is alleged to have been committed deliberately and dishonestly on a multitude of occasions in a relatively short period of time and would result in serious consequences for the Traders.

700.

The Traders submitted that there is no basis for concluding that any of the Traders could have believed that the abusive scheme alleged by the Authority would have been worthwhile, whether by reference to the execution rates of the Small Orders, performance of the Desk or individual Traders, or have a meaningful effect on bonuses.

701.

In this regard, the Tribunal considers that the Traders’ submissions have failed to acknowledge the fact that the Traders were market makers and that their job was to win RFQs submitted by MHI’s clients for the Desk by offering attractive prices in a competitive market and hedge the resulting exposure. These hedges needed to be executed swiftly, and we consider that they were important, even if viewed in isolation some of them were small. This was their routine business, a business they were seeking to improve. We do not, therefore, disregard the importance to the Desk, and thus to the Traders who worked on that Desk, of being in a position to win RFQs and execute hedges swiftly (and at a good price).

702.

For each of the Traders, our findings as to their experience and remuneration do also illustrate reasons which we accept might make it seem unlikely that they would commit this abuse – Mr Urra was successful, and was already receiving high bonuses, Mr Lopez had only recently joined MHI, Mr Sheth was junior and had recently been promoted. However, we have found that the Desk performance and individual performance is a factor in determining the amount of discretionary bonuses, and the size of Mr Urra’s bonuses in prior years and the proposed amounts of the bonuses for 2016/2017 show the potential rewards for the Traders if they were found to be performing well. It would be an error to dismiss this as of no consequence.

703.

Further, we consider that this emphasis on the lack of (or minimal) rewards for an abusive strategy should not be assessed in isolation and must take account of the Traders’ expectations as to the risks involved, or the potential for their conduct to be detected.