BOE ‘Fair and Effective Markets Review’ releases final report

The Fair and Effective Markets Review yesterday published its Final Report, which sets out 21 recommendations to help restore trust in the wholesale Fixed Income, Currency and Commodity (FICC) markets. The Review was established by the Chancellor of the Exchequer and Governor of the Bank of England in June 2014 to help to restore trust in those markets in the wake of a number of recent high profile abuses.

In August 2014, the Review made recommendations to HM Treasury bring a further seven major UK-based FICC benchmarks into the scope of the UK legislation originally put in place to regulate LIBOR. These recommendations were implemented by HM Treasury on April 1st 2015.

On October 27th 2014, the Review published a consultation documefnt examining what needs to be done to reinforce confidence in the fairness and effectiveness of the Fixed Income, Currency and Commodities (FICC) markets.

On Wednesday June 10th, the Bank of England (BOE) ‘Fair and Effective Markets Review’ published its Final Report, setting out 21 recommendations to:

  • Raise standards, professionalism and accountability of individuals
  • Improve the quality, clarity and market-wide understanding of FICC trading practices.
  • Strengthen regulation of FICC markets in the United Kingdom.
  • Launch international action to raise standards in global FICC markets.
  • Promote fairer FICC market structures while also enhancing effectiveness.
  • Promote forward-looking conduct risk identification and mitigation.

The Review’s Chairs will provide a full implementation report to the Chancellor of the Exchequer and the Governor of the Bank of England by June 2016.

“The age of irresponsibility is over,” Governor of the Bank of England Mark Carney said at yesterday’s Mansion House speech.

Recommendations to raise standards, professionalism and accountability of individuals include:

i. Encouraging IOSCO to consider developing a set of common standards for trading practices that will apply across all FICC markets;

ii. Extending UK criminal sanctions for market abuse to a wider range of FICC instruments and lengthening the maximum sentence from 7 to 10 years’ imprisonment;

iii. Mandating qualification standards to improve professionalism and disclosure requirements for references to avoid misconduct going undetected when individuals change jobs.

What does it mean for FX markets?

faireffecThe review stated that the global code should develop standards and principles concerning manipulative behavior that are relevant to FX markets, and also provide worked examples and guidelines to illustrate practices that are consistent or inconsistent with those standards.

Second, the code should further develop standards on the handling of price sensitive information, including guidelines on the appropriate communication of ‘market color’ and guidelines on the types of market sensitive information on the basis of which it would be inappropriate to trade.

Third, the code should set standards for the treatment of clients and counter-parties. This section of the code should address issues such as the prevention and management of conflicts of interest, especially concerning mixed principal and agent roles. Finally, the new code should establish standards for trading venues in FX markets, covering issues such as the management of risks introduced by high frequency trading and standards of transparency.

Another interesting point made in the review concerning FX is the absence of ‘time stamps’ on some client orders which can make it difficult for investors to assess the efficiency of their FX executions, creating potential opportunities for abusive practice. The Review has concluded that time stamps should always be provided.

Check out below Bank of England Governor Mark Carney’s major speech at the Mansion House on June 10th 2015 where Governor Carney discussed in detail the reforms concerning the the final report of the Fair and Effective Markets Review.

To view the final report with all the details, click here.

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