The UK authorities have published the final report of the Fair and Effective Markets Review. The Review was established a year ago, following a number of high profile abuses in the wholesale Fixed Income, Currency and Commodity (FICC) markets. Although a review rather than a legislative proposal, market participants should not be complacent about the potential scale of change likely to come to the FICC markets both in the UK. The key question is how this is landed, if at all, outside the UK.
The Review’s 21 recommendations are aimed at restoring trust and fairness in FICC markets, while also boosting their overall effectiveness.
This is important for all participants in FICC markets, on both the buy and sell sides, including foreign firms operating in these markets in the UK. There is a wider global read-across, with some of the recommendations addressed to international standard setters. Only time will tell how the international community will react. We anticipate the FSB will emerge as a key catalyst.
The review points out the multiple regulations already in force or in progress to reform FICC markets, including EU legislation such as the Market Abuse and European Market Infrastructure Regulations (MAR and EMIR) and the updated Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR); the design and oversight of benchmarks (including existing UK requirements as well as pending EU requirements); risk-based remuneration; and governance and accountability (including the UK Senior Managers and Certification Regime).
However, the Review identifies a need for further progress in four main areas of the FICC markets:
In addition, the Review identifies a set of principles to guide a more forward-looking approach to the structure, behaviour and supervision of FICC markets.
Firms operating in FICC markets are already on full alert that they need to raise their standards of conduct. And, as noted in the Review, a wide range of regulatory reforms are already being implemented or designed. While the FEMR is strong in its tone and its ambition, the industry, the regulators and new bodies like FMSB need to finalise specifics and agree implementation dates. This may lead to firms having to adopt regulatory reforms in a piecemeal fashion, before the full picture is available to them, especially as some of the recommendations will depend on the development of global standards.
Moreover, as the Review recognises, regulatory reform may already have contributed to the marked reduction in liquidity in some FICC markets. Further reform could accentuate this trend, with implications for all market participants.
The extension of parts of the Senior Manager and Certification Regimes to a wider range of firms will require those firms to make major changes to their allocation of responsibilities and to how they monitor staff covered by the Certification Regime. Banks and insurers have already found this to be a significant challenge. In addition, firms undertaking multiple activities will need to understand and respond to the development of a potentially disparate and confusing set of regimes - the regimes for banks, insurers and FICC firms will each be different, while the approved persons regime will continue to operate for all other regulated firms. Similarly, it is unclear how far a standard regulatory reference form would extend across different types of regulated firm.
The new FICC Market Standards Board could help create much needed global guidance to market participants on expected trading practices, and by working collaboratively with the Regulators, can improve consistency and the effectiveness of markets. The broader membership and global focus of the FMSB, in comparison to the UK Banking Standards Board (BSB), may result in FICC conduct issues being identified quickly as they emerge. However, the Review recognises the importance of the relationship between the UK Banking Standards Board and FSMB to work together on areas of common interest. Confusion may result from having multiple bodies – both regulatory and industry led – looking at practices and developing standards, therefore close cooperation and clear backing from supervisors will be needed to achieve its objectives, yet the more adversarial relationships between banks and supervisors in recent years could undermine the cooperation needed.
Overall, the focus on a single set of markets and the introduction of further detailed measures specific to these markets may distract firms from the wider-ranging need to improve culture and behaviours across all their activities. Although the Review encourages firms to continue on this journey, it clearly does not see this as the solution to the issues identified.
How achievable the intended global outreach will be remains to be seen. Other international regulators have already expressed a commitment to similar principles – and at a principle level more harmonisation is possible. The latest paper from IOSCO on 'credible deference' shows an intent to increase cooperation and raise standards. But as we have seen with other international principles, differences in the detail can lead to operational challenges for the firms affected and potentially open up opportunities for regulatory arbitrage.
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