In November 2014, Finanstilsynet (the Danish FSA) carried out an ordinary on-site inspection of GXG Markets A/S ("GXG") at the address of the company in Horsens.
The purpose of the on-site inspection was to follow-up on the business conduct in GXG, specifically the handling of the intrinsic risks in the company's business model. Furthermore, Finanstilsynet focused on the capital structure of GXG, as well as the general viability of its business model.
Summary and risk assessment
GXG is licensed to operate on the regulated market, GXG Official List. As ancillary activities GXG is licensed to operate the multilateral trading facilities, GXG First and Main Quote.
The GXG business model is based on admitting companies to trading, as well as approving other market participants based outside Denmark - in several cases market participants from third countries with a large geographical distance to Denmark.
Accordingly, this business model sets substantial demands on GXG's ability to test the fitness and propriety of issuing companies and trading members before granting access to GXG's trading platforms.
The business model also sets substantial demands on GXG's ability to subsequently carry out adequate and timely monitoring of the transactions performed through GXG’s trading system as well as the issuing companies’ compliance with GXG’s own rules (market surveillance).
Finanstilsynet has previously – in cases involving GXG's admission of companies to trading – conveyed to GXG a number of risk statements, reprimands and orders. One case was reported to the police by Finanstilsynet.
During the on-site inspection, Finanstilsynet ascertained that GXG had admitted several third-country-based issuing companies to trading on its market places in violation of GXG's own rules. In the opinion of Finanstilsynet, in many cases, GXG had interpreted its own rules such that companies only just qualified for admission, and in many other cases, GXG did not observe its own admission criteria at all.
It is the opinion of Finanstilsynet that GXG has grossly ignored the risk information notified to GXG over a long period of time, and that, by admitting the many additional companies, GXG took risks which, historically, GXG has been unable to manage.
Furthermore, the Finanstilsynet notes that GXG only had a profit for two months in 2014. These were the two months immediately before September 2014 when GXG's revised rules entered into force and led to limitations on companies which could be admitted to trading. In the view of Finanstilsynet, this confirms the fact that GXG had a financial incentive to admit as many companies as possible to trading before the revised rules entered into force, without taking into account the special risks associated with admitting the companies. Finanstilsynet had already pointed this out to GXG.
During the on-site inspection, Finanstilsynet found that, internally in the organisation, GXG had allowed far more than 70 cases on possible violation of GXG's own rules to develop without processing these cases or making the statutory notification to Finanstilsynet.
At the time of the on-site inspection, GXG did not yet have a full overview of these cases but had concluded, however, that several cases concerned "fraud claims" or other behaviour which may give rise to suspicion of fraudulent behaviour.
In the view of Finanstilsynet, the observations made confirm the risks in GXG's business model; risks which Finanstilsynet has repeatedly pointed out to GXG.
Finanstilsynet considers it to be gross negligence that GXG has allowed the build-up of such an excessive caseload without GXG having either processed these or having notified these to Finanstilsynet.
Finanstilsynet particularly notes that several of the cases may have inflicted losses on investors or other market participants due to fraudulent behaviour.
As an operator of a regulated market, GXG is responsible for the market being conducted in an adequate and appropriate manner.
In the assessment of Finanstilsynet, even though there is a great difference between actual operation of its primary and ancillary activities (GXG First Quote and GXG Main Quote), GXG also bears a general and fundamental responsibility for ensuring that the ancillary activities are also operated in an adequate and appropriate manner, including the enforcement of private-law regulations for operating multilateral trading facilities.
The on-site inspection carried out by Finanstilsynet revealed that GXG repeatedly and grossly neglected and disregarded its own rules and internal guidelines. As a consequence of this neglect, GXG exposed itself and the market to the exact same risk elements that the very same rules are intended to manage and mitigate.
Against this backdrop, Finanstilsynet assesses that GXG has failed to operate its regulated market and multilateral trading facilities in an adequate and appropriate manner. Such operation is irreconcilable with continuation of the company's licences and therefore, Finanstilsynet assesses that the company's licences should be withdrawn.
Against this background, on 29 May 2015 Finanstilsynet submitted to GXG a draft decision on withdrawal of GXG's licences.
On 29 June 2015, GXG published a notification that, with immediate effect, GXG had ceased admitting new companies to trading on GXG's market places. In the notification, GXG stated that the cessation of admission was due to GXG having entered into a dialogue with Finanstilsynet about the company's regulatory set up, and that GXG was considering relinquishing its Danish market operator license and ceasing its Danish activities.
Subsequently, on 6 July 2015, GXG published a notification that GXG has decided to voluntarily relinquish its Danish market operator licenses effective as of 18 August 2015.
Given that GXG has expressly waived use of the company's licences, Finanstilsynet will take no further steps regarding the withdrawal hereof.