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Germany’s Bafin assessing market timing

GERMANY - German financial services regulator Bafin has taken steps to assess the possible existence of a market timing problem in Germany.

The Bundesanstalt fuer Finanzdienstleistungsaufsicht has sent out questionnaires to all the 80 or so investment companies operating in Germany, asking for systems information on the sale and repurchase of investments.

The regulator is currently evaluating the replies, but declines to say what form its response is likely to take. “There are three avenues we can use,” said Sabine Lautenschlaeger, head of the Bafin press office.

“We can recommend a change in the law to the Government. We can recommend a particular policy change. Or, if there is a problem only with individual institutions, we can talk to the specific institutions themselves.”

In Germany, as in the UK, market timing – the taking of extremely short-term positions in funds - is not illegal. However, late trading - transacting business after the markets close but at pre-close prices – is illegal.

By contrast, late trading constitutes a grey area for the UK. Although it is against the regulations, it is not strictly illegal.

Lautenschaleger said: “As we have a law against late trading, any recommendation in this area would be a case of a new interpretation of the law. Of course, just because an activity is forbidden does not mean you can stop it happening.”

But she said that companies not complying with particular procedures would not be named and shamed, as confidentiality for credit institutions is enshrined in German law.

In the UK, the Financial Services Authority is carrying out a similar exercise with the UK’s 20 biggest unit trust managers. Details have been requested on transactional procedures such as pair trades, use of dilution levy techniques and fair value pricing, as well as systems controls and compliance generally.

“We wanted to find out how such activities are monitored, and how they identify the underlying counterparties,” says press officer David Eacott. “Our regulatory response will depend on whether any problem is specific to a few firms, or is generic throughout the industry.”

Eacott defended the decision to contact only 20 firms. He said: “The conditions which arbitrageurs need are small price differentials, together with scale. So they are likely to be targeting the bigger funds. The top 20 managers have a large market share so if there is any such activity we are likely to pick it up.”

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