A bank that operates both a capital markets business and an investment banking advisory business faces a structural conflict. The advisory side routinely receives material non-public information (MNPI) about its clients — a company planning a merger, a government preparing a bond issuance, a corporate evaluating a refinancing. The trading side of the same bank executes transactions in the market. If information flows freely between the two, traders could profit from information that is not publicly available — insider dealing — or could disadvantage clients by acting on information obtained in confidence. Information barriers, colloquially known as Chinese walls, are the structural and procedural controls that prevent this.
Why Information Barriers Exist
The legal basis for information barriers in the UK derives from the Market Abuse Regulation (MAR) and the Financial Services and Markets Act 2000. MAR prohibits insider dealing: using information not publicly available that, if disclosed, would likely have a significant effect on the price of a financial instrument to trade in that instrument. It also prohibits unlawful disclosure of inside information and market manipulation.
For a bank, the challenge is that receiving MNPI is part of its legitimate business — an M&A advisory team needs to know about a deal to advise on it. The question is how to ensure that information does not flow from those who legitimately hold it to those who could misuse it. Information barriers are the answer: they define which parts of the firm are "inside the wall" (in possession of MNPI) and which are "outside the wall" (permitted to trade freely in the market).
Beyond the legal requirement, information barriers protect the bank's clients. A corporate client that shares confidential strategic plans with its investment bank expects that the bank's trading desk is not using those plans to position itself in the market. Breaching that expectation is a serious conduct failure that destroys client trust and invites regulatory action.
Physical and Logical Barriers
Information barriers are implemented through a combination of physical and logical controls.
Physical Controls
Physical separation involves placing conflicted teams on different floors or in different buildings. Access controls — swipe-card entry systems, locked areas — prevent staff from wandering between areas that should be separated. Meeting rooms used for confidential conversations are restricted to those with appropriate access. In some banks, separate seating areas, separate entrances, and even separate email systems are used for particularly sensitive deals.
Logical Controls
Logical controls operate on systems and data flows. IT access permissions are set so that individuals on one side of the wall cannot access data belonging to the other side. Email systems may be configured to block communication between certain groups. Shared drives and collaboration platforms are partitioned. Surveillance systems monitor electronic communications for flows that suggest a wall breach — a message from an M&A banker to a trader containing deal-specific language would be flagged for compliance review.
Neither physical nor logical controls alone are sufficient. A determined individual can circumvent physical separation by using personal devices or informal channels. Logical controls can be technically complex to maintain and may have gaps, particularly as collaboration platforms proliferate. The effective implementation of information barriers requires both technical controls and a strong cultural commitment to the principle they embody.
The Watch List and the Restricted List
When the bank takes on a mandate that involves MNPI, the relevant name or instrument is typically added to one of two internal lists maintained by compliance: the watch list or the restricted list.
The Watch List
The watch list is a confidential compliance tool. Adding a company to the watch list signals that the bank has, or may have, MNPI about that company. The list is not published to the trading desk. Instead, it triggers heightened surveillance of trading activity in that company's securities: any trades in the watched name are scrutinised by compliance to determine whether they could have been informed by the MNPI the bank holds. The watch list is an internal monitoring tool, not a trading restriction.
The Restricted List
The restricted list is a published prohibition on trading. When a company is added to the restricted list, the bank's trading desks are instructed not to initiate new positions in that company's securities. Unlike the watch list, the restricted list is circulated to relevant trading and sales staff (though not necessarily with the reason for the restriction). A restricted list entry signals that the bank has moved beyond surveillance: it has determined that it has MNPI that is material enough to require a trading prohibition.
Moving a name from the watch list to the restricted list, or removing it from the restricted list when the MNPI becomes public (typically upon announcement of the deal), is a compliance decision. The timing of these decisions — particularly the removal from the restricted list — requires careful judgment to avoid any appearance that the bank was positioned in anticipation of a public announcement.
The Wall-Crossing Process
Sometimes a bank needs to share MNPI with individuals who would normally be outside the wall — for example, a credit trader who needs to understand the terms of a forthcoming bond issuance to price a related credit derivative, or a research analyst who needs to understand the strategic rationale of a deal. This is the wall-crossing process.
Wall-crossing is not permitted casually. The individual being crossed must be notified that they are about to receive MNPI and must consent to crossing. Crossing into the wall typically means agreeing to certain restrictions on their subsequent activity — they may be unable to take positions in the relevant securities until the information becomes public. The crossing is documented by compliance: who crossed, when, what information they received, and the restrictions imposed. The compliance record is maintained in case the crossing is later reviewed by regulators.
In some cases, the bank will conduct a "cleanse" process: before a transaction is announced, the MNPI recipient is given a public-side briefing on the transaction and their restrictions are lifted, on the basis that the information they previously held is now public. The timing and process for cleansing must be carefully managed.
The Compliance Officer's Role
Compliance owns the information barrier policy and its day-to-day administration. This includes maintaining the watch list and restricted list, managing wall-crossing requests, monitoring electronic communications for potential breaches, investigating any suspected flow of MNPI across the wall, and training staff on their obligations under MAR and the firm's own policies.
Compliance also manages the relationship with regulators on MAR matters. If the FCA inquires about a pattern of trading ahead of a public announcement, compliance must be able to demonstrate the effectiveness of its information barriers and the absence of any improper information flow. This requires detailed records — of wall-crossings, of communications surveillance, of restricted list management — that compliance maintains as part of its routine activity.
The consequences of information barrier failures are severe. The FCA has imposed substantial fines on firms and individuals for insider dealing and for failures to maintain adequate barriers. Individual traders and bankers have faced criminal prosecution. In a firm where information barriers are not taken seriously, the risk is existential — not just financial but reputational, in an industry where reputation is the fundamental product.