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The Fair and Effective Markets Review: the results are in
Practical Law UK Articles 4-616-6186 (Approx. 4 pages)
The Fair and Effective Markets Review: the results are in
by Calum Burnett and Sarah Hitchins, Allen & Overy LLP
| Published on 25 Jun 2015 • United Kingdom |
After 12 months of work, on 10 June 2015, the Fair and Effective Markets Review published its final report. Running to 106 pages, the report covers a wide range of topics and issues relating to fixed income, currencies and commodities markets, and sets out 21 recommendations for improvements.
After 12 months of work, on 10 June 2015, the Fair and Effective Markets Review (the review) published its final report (the report). Running to 106 pages, the report covers a wide range of topics and issues relating to fixed income, currencies and commodities (FICC) markets, and sets out 21 recommendations for improvements.
The recommendations made by the report are broad in scope and leave a significant amount of flexibility as to how they should be implemented. As a result, the report is likely to be the first step on a long road of changes for the way in which the FICC markets operate and the regulations to which they are subject.
Deficiencies in the markets
The need for the review arose from a concern that public trust in the wholesale markets had been diminished following a series of high-profile enforcement actions involving FICC markets. In June 2014, the review was launched (www.practicallaw.com/0-575-0637). Working together, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England sought to consider where there had been deficiencies in terms of the fairness and efficiency of the FICC markets, and what should be done to address any remaining deficiencies.
Following consultation on its scope, the review focused on areas including: market structures, standards of acceptable market practice, systems of internal governance and control, reinforcement of standards through market discipline, individual accountability and remuneration and incentive schemes (www.practicallaw.com/2-589-4437).
The key recommendations
The report sets out some important recommended changes for FICC markets, including:
- Creating a new statutory civil and criminal market abuse regime for spot foreign exchange.
- Increasing the maximum sentence for criminal market abuse from seven to ten years.
- Extending the current senior managers and certification regime to cover asset managers, hedge funds and broker-dealers. However, notably neither the presumption of responsibility (reversal of the burden of proof in enforcement cases) nor the criminal offence of participating in a decision which causes a financial institution to fail, have been extended in the same way.
- Establishing a FICC Market Standards Board that will help to identify emerging risks in FICC markets where market standards could be strengthened and address areas of uncertainty in specific trading practices. It is also anticipated that the FICC Market Standards Board, members of which will be drawn from a wide range of market participants, will help to promote adherence to industry standards, good practice, and the international convergence of standards.
- Implementing a global foreign exchange code which provides a comprehensive set of principles to govern trading practices around market integrity, information handling, treatment of counterparties and standards for trading venues. The report states that the code should also include examples and guidelines for behaviours, as well as stronger tools for promoting adherence to the code by market participants.
- Promoting a more forward-looking approach to supervising and monitoring FICC markets. For example, the report states that more should be done to scrutinise FICC market structures, behaviours and trading patterns for potential misconduct and conduct risks. The report also notes that regulators can play an important role by deploying forward-looking and early intervention supervision techniques. If misconduct is identified earlier, the report suggests that these supervision techniques may be deployed and formal enforcement investigations can be avoided.
- Promoting effective competition and awareness of competition law in FICC markets. The report touches on concerns about slow technological innovation in some FICC markets, as well as concerns in relation to the pricing and sale of investment banking products. However, the review placed confidence in the FCA's watching brief to identify potential abuses of dominant positions by those who are already established in FICC markets.
- Enhancing traders' awareness of the application of competition law to FICC markets through materials published by the FCA and the new FICC Markets Standards Board, as well as through firms' internal training programmes. The report sets out certain information about competition law that might be provided to FICC traders.
In addition to the above, with effect from 1 April 2015 certain additional FICC benchmarks have been subject to FCA authorisation and regulation (www.practicallaw.com/1-610-2087).
Practical impact
The report contains a considerable amount of helpful and detailed commentary about the FICC markets. However, much of what it sets out will not be new to the industry. For example, many of the recommendations set out in the report rely on separate and existing initiatives, such as the senior managers and certification regime, steps that have already been taken to regulate additional benchmarks and the expansion of the market abuse regime by the Market Abuse Regulation (596/2014/EU) (see Focus "Senior managers regime: strengthening accountability in banking" this issue; see feature article "Market abuse: a tough new regime").
In addition, most of the report's recommendations are aimed at senior management and industry leaders, as well as creating additional voluntary codes of conduct. This leaves open the issue of how the review's recommendations and expectations of good market practice will filter down in practice to reach middle management and those more junior employees who are involved in FICC markets; the very categories of individuals who have been identified by regulators as having engaged in historic misconduct in connection with FICC markets.
As the report acknowledges, the way in which the review has drafted its recommendations allows those bodies responsible for implementation (including the FCA, PRA, International Organisation of Securities Commissions, the Treasury and the Bank of England) a great deal of flexibility in terms of how they address and implement them. As a result, it remains to be seen how significant an impact these recommendations may have in practice until we see how they will be implemented.
Next steps
The report envisages that a variety of bodies will take forward its recommendations. As a result, the report is likely to be only the starting point for changes being made to the FICC markets; many rounds of consultation papers, draft statutory instruments and policy statements issued by other bodies are likely to follow in the coming months and years.
Calum Burnett is a partner, and Sarah Hitchins is an associate, in the Banking, Finance and Regulatory Litigation Group at Allen & Overy LLP.
The Final Report of the Fair and Effective Markets Review is available at www.bankofengland.co.uk/markets/Documents/femrjun15.pdf.