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Some Market Timing, but No Late Trading, Found in U.K. Mutual Funds

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LONDON (–Mutual funds shareholders in the United Kingdom are not immune to market timers, but they have not been affected to anywhere near the extent that shareholders in the United States have been, according to a new report from the Financial Services Authority.

Although the FSA stopped short of issuing any kind of regulatory “all clear,” officials there believe that current safeguards against late trading and market timing have been effective. A survey late in 2003 of 31 Collective Investment Schemes with approximately 160 billion pounds sterling in assets–roughly 75% of all assets in such schemes–showed no evidence of late trading and only about 5 million pounds sterling worth of market-timing activity.

As part of its investigation, the FSA looked at 9,620 transactions, of which 118 were examined more closely during site visits to the funds involved, according to a statement from the FSA.

“The picture we have uncovered is generally quite an encouraging one,” FSA Managing Director Michael Foot said. “Although there is evidence of market timing having occurred within our authorized funds, looking at all the evidence we have amassed, we can find no sign either that market timing is widespread or that it has been a major source of detriment to long-term investors.”

Speaking at the U.K.’s National Association of Pension Funds conference, FSA Chief Executive John Tiner said his agency undertook the investigation in response to the growing mutual fund scandal in the United States. He said the goal was to determine if fund managers were being vigilant in blocking market timing and late trading and whether the controls they used to do so were effective.

“We found no evidence of late trading in U.K. CIS, and we think that the important controls provided throughout trustee and depositary structures make U.K. funds less susceptible to this practice,” Mr. Tiner told conference attendees.

As it is with U.S. mutual fund shares, late trading of U.K. mutual funds is illegal.

Most of the market-timing occurrences involved investors buying exposure to U.S. assets at noon London time (7 a.m. ET), based on the previous day’s 4 p.m. ET closing prices, Mr. Tiner said. That gave the UK investors a chance to take advantage of post-market-close economic news that surely would inflate U.S. asset values when the New York financial markets opened for trading at 9:30 a.m. ET, or 2:30 p.m. London time.

“Market timers don’t need to be using any non-public information to do this, and they’re not breaching any of our rules by ‘timing,’” Mr. Tiner said. “However, we believe this activity is capable of causing real detriment, which is why we feel strongly that fund managers must ensure it doesn’t happen.”

FSA officials said they would continue to be on the lookout for potential conflicts of interest between managers and investors, and that the agency would push for further regulatory reforms that would, among other things, amend rules to clarify what steps managers can take to deter market timers.

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