FCA places wholesale OTC derivatives market under the microscope


The Financial Conduct Authority (FCA) today announced plans to launch its first wholesale market study into investment and corporate banking to assess whether competition in the sector is working properly.

This follows the publication of its review into competition in the wholesale sector, which found that limited clarity over price and quality of services may make it difficult for clients to assess whether they are getting value for money, and that the bundling and cross selling of services could make it difficult for new entrants or smaller established firms to challenge established large players in the market.

Christopher Woolard, director of strategy and competition, said: “We have chosen this particular area because the benefits of effective competition in the market could be significant. The UK is a global hub for investment banking, and this sector plays a crucial role in our economy, helping companies raise capital for investment, expansion and funding ongoing operations.”

“What was clear from the discussions we had with stakeholders and firms was that there are unanswered questions about potential conflicts of interest and value for money in this market. This will form part of our wider work in the wholesale markets, alongside the Fair and Effective Markets Review” concluded Mr. Woolard.

Terms of reference for this study will be published in the spring of 2015, and will be informed by views from industry, trade bodies and clients. Feedback received to date included concerns around transparency, conflicts of interest and the impact that bundling services together has on competition, including new firms’ ability to enter the market.

By that time, the FCA will have gained competition concurrency powers that will allow it to enforce against breaches of the Competition Act and to refer markets to the Competition and Markets Authority for in-depth investigation.

During the wholesale sector review the FCA met with around 70 organisations and individuals, through a combination of round-tables and one-to-one meetings and received 40 written responses.

This provided feedback on other potential competition issues that might benefit from further investigation in the future, including:

How purchasers get value for money when buying asset management services.

The pricing and availability of data and related services.

Vertical integration of clearing and execution services.

The impact of a reduction in the number of clearing members and a lack of client clearing on over-the-counter (OTC) derivative markets.

The FCA will consider undertaking a market study into asset management and related services later in the year. However, for the other potential competition issues identified, it is expected that forthcoming regulations will affect the way competition works, so there are no immediate plans to conduct further studies into these areas.

For the official announcement from the FCA, click here.

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FCA places wholesale OTC derivatives market under the microscope

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