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The Exchange, as part of its oversight and supervision of stockbrokers, became aware in late 2006 of issues of concern regarding possible breaches by J&E Davy (Davy) of Irish Stock Exchange conduct of business rules. These related to its sale of a number of perpetual Constant Maturity Swap (CMS) bonds to some of its credit union clients.
Following a detailed regulatory review the Exchange issued its findings in a report to Davy, which was also provided to the Financial Regulator, in June 2007. Before various agreed measures had been implemented further relevant information became available to the Exchange. The Exchange’s final findings and the necessary actions to be taken by Davy were set out in a second report in February 2008. The report was also provided to the Financial Regulator.
In January 2008 Davy commenced a process which culminated in a proposal to credit unions, in May 2008, of a comprehensive arrangement which addressed performance issues with the bonds. This proposal was accepted by the vast majority of credit unions at a cost to Davy of over €35m. This negotiated settlement between Davy and its clients was welcomed by the Exchange as it dealt with the core issue of loss of value of the bonds.
The Exchange investigations concluded that there had been breaches of the Rules of the Exchange by the firm, in particular in relation to:- the completeness of disclosure of certain information to credit unions concerning the bonds and the provision of written evidence to demonstrate that it had taken due care to ensure that the relevant credit unions understood all the characteristics of the bonds; and
- taking all reasonable steps to ensure the bonds were in full compliance with the Trustee (Authorised Investment) Order 1998.
- the changed investment demands of credit unions which were seeking higher yield investments,
- fundamentally altered conditions in bond markets, and
- the extensive interaction between Davy and its credit union clients.
The Exchange is satisfied that Davy has taken appropriate remedial action to ensure that internal controls and conduct of business procedures have been rectified to mitigate against any recurrence of the breaches discovered. This and the arrangements agreed with credit unions bring closure to this matter and it addresses the actions required of Davy by the Exchange in its reports.
Note 1
The transfer of conduct of business rules and responsibilities in relation to member firm activities to the Financial Regulator, occurred with the introduction of the Markets in Financial Instruments Directive (MiFID) on 1st November 2007, since then the Exchange has no further regulatory responsibility for conduct of business issues with member firms however it retains responsibility to conclude regulatory issues pre-dating 1 November 2007.
