France’s Financial Markets Authority (AMF) has posted its findings following a set of inspections focusing on the implementation of liquidity contracts.

In 2020, the AMF carried out a series of inspections at five firms to analyse how they have implemented liquidity contracts on behalf of listed companies.

The accepted market practice for liquidity contracts on shares came into force on January 1, 2019. These contracts set out the conditions under which a listed company delegates to an investment services provider the task of executing transactions on its behalf in order to stimulate the market for its securities and promote liquidity.

When implemented in accordance with the accepted market practice instituted by the AMF, these contracts establish the assumption that intermediaries and issuers who comply with market manipulation regulations are acting legitimately. This corresponds to the exemption framework provided in Article 13 of the Market Abuse Regulation (MAR).

The accepted market practice established by the AMF imposes restrictions on the management of liquidity contracts regarding:

• volume of trading in a day;
• price limit for orders presented to the market;
• resources allocated by the issuer to the liquidity contract.

As part of its review of this practice, the AMF carried out a series of short, thematic “SPOT” inspections at five investment services providers in 2020.

These inspections focused on:

• the service providers’ organisational structure (independence of the operator responsible for liquidity contracts, service provider’s compensation, managing potential conflicts of interest, technical resources and facilities, and liquidity account management);
• the management of volume and price limits and limit exceeding;
• the internal control system implemented to support this liquidity management activity;
• the information provided to the listed company and compliance with transparency obligations imposed by the regulator.

The regulator determined that the organisational structure put in place by the firms inspected was satisfactory overall in terms of meeting the requirements established for the accepted market practice. However, there is room for improvement in relation to managing limits and justifications, and in some situations the monitoring systems implemented have shortcomings that require corrective measures.

The summary report shows that the price and volume trading limits set by the AMF are not always complied with by the firms in the sample. Up to a certain level, any crossing of the limits imposed must be justified in order to benefit from the exemption framework provided for in the MAR. Above this level, transactions carried out on the market are not prohibited, but they lose the benefit of the exemption framework.

Among the good practices identified, the AMF noted the implementation of monitoring or blocking control mechanisms integrated into the order management system, a specific reporting system for monitoring limit exceeding, and an exhaustive periodic control of the resources allocated by issuers.

Widely used in France (more than 400 French companies have entered into a liquidity contract on their securities), this practice is considered essential for the satisfactory functioning of the French equities market for small and medium-sized issuers.