UK: The Fair And Effective Markets Review | Fundamental Change In FICC Markets

Last Updated: 16 June 2015
Article by Tim Rawlings, David Strachan, Mark Cankett and Stephen Farrell

Most Read Contributor in UK, August 2017

HM Treasury, the Bank of England and the Financial Conduct Authority have delivered the final report on the Fair and Effective Markets Review (FEMR), a broad and comprehensive analysis of the fixed income, currency and commodities (FICC) markets. The review seeks to identify the root causes of the recent misconduct and other sources of perceived unfairness in FICC markets, evaluate the impact of regulatory reforms, and make recommendations to fill the remaining gaps.

The report contains a total of 21 recommendations, some of which have the potential to dramatically affect market participants, particularly the extension of the Senior Managers and Certification Regimes (SMR) and the introduction of a FICC Markets Standards Board.

The recommendations are based on six broad principles, listed below:

  1. Individuals held accountable for their actions;
  2. Collective responsibility for firms in developing and complying with standards of market practice;
  3. Broadening the regulatory perimeter, holding management to account and toughening sanctions for misconduct;
  4. International coordination and convergence;
  5. Promoting fairer and more effective FICC markets; and,
  6. Taking a forward looking approach to identifying and managing conduct risk.

The recommendations include, inter alia, extending the criminal and civil sanctions for market abuse to FICC markets, the creation of an FICC Markets Standards Board, common international standards for trading practices, a global FX code of conduct, and the introduction of mandatory regulatory references when employees move firms. Set out below is additional detail on some of the key recommendations and themes of the final report.

Individual accountability

As expected, the report places significant emphasis on individual accountability for persons participating in FICC markets, partly driven by concerns that "firms might increasingly treat fines as costs of doing business". It recommends extending "elements" of the SMR to "firms active in FICC markets". This would widen the range of firms subject to the regime, but it would not apply all of the requirements of the SMR. For example it would not extend the presumption of responsibility, under which Senior Managers are held accountable for regulatory breaches in the areas they are personally responsible for unless they can satisfy the regulator that they took reasonable steps to avoid the breach.

It is not yet clear how "firms active in FICC markets" will be defined. While the report indicated that this would include inter-dealer brokers and asset managers, there is uncertainty over whether this would be a blanket inclusion of all, e.g., asset managers or whether "active FICC firms" would be defined more narrowly. In addition, by extending elements of the regime to FICC firms rather than the full SMR, some firms will be covered by this 'reduced' framework, while others (e.g. the most senior personnel in banks) will still be covered by the 'full' SMR.

Extending the SMR will clearly increase personal accountability for top executives (both in the UK and potentially overseas) in active FICC firms, but the extension of the Certification Regime will come with significantly higher compliance costs especially for small firms. Deciding which firms to bring within this wider scope will be challenging especially as it is likely that a large number of firms are "active" in FICC markets even where this forms an ancillary aspect to their business.

The proposed extension of the Certification Regime will present individual firms with their own scoping challenges. What activities are covered by which staff? Who are their customers and where are they located? These questions will need to be answered if firms are to identify all the individuals covered by the extended Regime.

FICC Market Standards Board

The proposed FICC Markets Standards Board (FMSB), modelled on the Takeover Panel, will be tasked with identifying emerging risks in FICC markets, addressing uncertainty in trading practices and providing practical guidance on implementing codes of conduct, promoting compliance with codes of conduct and best practice, and contributing to global efforts on the convergence of standards.

Depending on the final scope, make-up and resourcing of the FMSB, it has the potential to enhance compliance through an "effective but proportionate standards regime" and increased dialogue between the markets and regulators. Perhaps of greatest utility, the FMSB will provide a forum to address uncertainty in codes of conduct, and to translate what the codes mean for day-to-day trading, e.g. through case studies. This role may provide some comfort to those individuals subject to the 'reduced' SMR by helping address any ambiguities from the standards to which they will be held to account. For the FMSB to be effective it will need to be able to identify and resolve issues and uncertainty in a timely manner, since in such rapidly evolving markets any delayed response could have significant consequences.

The report sets out criteria for the make-up and membership of the FMSB that will relieve concerns that it could be dominated by a small group of market participants. Membership will be drawn from across the market and avoid dominance by one group, members must have sufficient authority to apply the FMSB's outputs within their firm, and members of the panel and the secretariat must be experts in their field.

As noted above, the extension of the SMR and the FMSB, in particular, have the potential to have a dramatic impact on FICC markets. It will also be interesting to see how the dynamics between the two recommendations develop as they also have the potential to be self-reinforcing. The membership requirements of the FMSB suggest it will include senior representatives from firms, who are also likely to be in senior management functions (SMF) under the SMR. The new accountability arrangements will give "greater teeth to voluntary market codes" – a factor not present in other jurisdictions – this in turn will incentivise senior individuals to engage with the FMSB to help develop workable, clear and enforceable standards to which they will be held to account. However, the regulators will also need to take a view, and engage in regular dialogue with the FMSB, on what constitutes "proper standards of market conduct" and whether the outputs from the FMSB are sufficiently rigorous to meet this need.

Conduct risk management

As expected, there is a lot of focus in the report on conduct risk management, for example the implementation by firms of new monitoring tools for surveillance of trading patterns and behaviour. Together with competition, these themes have been high on the FCA's agenda for some time. They look set to gain more attention at the EU and international level, especially given the work announced by the FSB on conduct risk and Commissioner Lord Hill's recent speeches on competition, choice and transparency.

Implementing conduct risk management frameworks, supported by appropriate conduct risk management information, to achieve the outcomes envisaged in the report will require significant investment, not least in technology to overcome issues around data. Having these systems in place will also be important to support individuals covered by the SMR, so that they can discharge their duties under the regime.

Global outlook to regulation

The report reflects the global reality of FICC markets and the recommendations are designed to recognise the importance of a global attitude to regulation. For example, the FMSB "should aim to have international reach". The report proposes roles for the International Organisation for Securities Commissions (IOSCO), the Financial Stability Board (FSB) and the Bank for International Settlement (BIS) to develop international standards e.g. on trading practices, processes for self-assessment against benchmark principles, aligning remuneration and conduct risk, and a single global FX code - building on the FSB Foreign Exchange Benchmark Group.

Achieving international convergence will not be an easy task and some recommendations will be simpler to achieve than others. Recent developments, for example in the FX Working Group at the BIS, have shown that regulators are willing to work more closely on regulation in FICC markets, but it is too early to say how this will be translated into practice. Mark Carney, as Chair of the FSB, is well placed to promote the FEMR to international organisations and other key regulators for FICC markets.

Forward-looking approach

Principles 5 and 6 in the report are focused on delivering a more forward-looking approach to regulation and conduct in FICC markets. This is in recognition of the significant regulatory change that is ongoing and may change the dynamics of the market, and the pace of innovation in these markets. Trading practices and business models will change as regulation comes into force, so there is need for a mechanism to identify risks and maintain standards of conduct as the markets respond to regulation. The FMSB will play a central role in this, but it will also require transparency and surveillance of trading patterns, stable market infrastructure and a forward-looking mind-set from supervisors.

What next?

The recommendations are ambitious, not least with respect to the global outlook, and if fully implemented, will have a significant impact on FICC markets and market participants, e.g. through the wider scope of SMR style arrangements. It will take time to fully analyse and understand the impact of the report and its recommendations. On some aspects additional detail is required before the implications can be understood, for example the extended scope of the SMR.

Among the areas we expect market participants to focus on are:

  • Which firms and hence which individuals will be covered by the extended SMR;
  • Implementing monitoring and surveillance tools to manage conduct risk; and,
  • Reviewing benchmark remediation programs in light of the FEMR findings.

While many of the domestic provisions are likely to be implemented in the near-term, recommendations requiring input from global bodies will take much longer. Firms should not see the final report as the end of FEMR. In many respects it looks more like the beginning. Firms should expect to see consultations on proposed rules start to be released which they will need to engage with and prepare to implement. A review on the progress of implementation will be produced in June 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.