FEMR Consultation: How Fair and Effective are the FICC Markets?

1 11 2014

In its important consultation document published on 27 October 2014, How fair and effective are the fixed income, foreign exchange and commodities markets?, the Fair and Effective Markets Review (FEMR), has asked no less than 49 questions to restore trust in the wholesale markets which, as exposed by recent events, have been susceptible to abuse and cheating: see earlier post here. Headed by Nemat (Minouche) Shafik, the Bank of England’s Deputy Governor for Markets and Banking, Martin Wheatley (Chief Executive Officer, Financial Conduct Authority) and Charles Roxburgh (Director General, Financial Services, HM Treasury) as co-chairs, the FEMR, which was created by the Chancellor in June 2014 – see terms of reference – is expected to present its final recommendations in June 2015.

The FEMR intends to conduct an exhaustive and dynamic evaluation of the manner in which wholesale financial markets operate and over and above helping to restore trust in the Fixed Income, Currency and Commodities (FICC) markets the FEMR also aims to influence the international debate on trading practices. Earlier in the year (August 2014), the FEMR recommended and consulted on bringing another seven major UK-based FICC benchmarks into the regulatory perimeter originally rolled-out to regulate LIBOR.

In essence, the present consultation concentrates on the:

  • areas where fairness and effectiveness are currently deficient;
  • extent to which ongoing regulatory, organisational and technological change that has taken place since the financial crisis is likely to address these deficiencies; and
  • further steps which are needed to help ensure a fair and effective FICC market.

A robust infrastructure and predictability lie at the heart of the FEMR’s work and it is proposed that “fair” markets are those which:

  • have clear and consistently applied standards of market practice
  • demonstrate sufficient transparency and open access (either directly or through an open, competitive and well-regulated system of intermediation); and
  • allow market participants to compete on the basis of merit; and provide confidence that participants will behave with integrity.

The FEMR seeks responses (to be emailed to FEMR@bankofengland.co.uk.) to the 49 questions asked in its 69-page consultation by Friday 30 January 2015.

The questions are set out under the following heads: what does “fair and effective” mean for FICC markets?; a framework for evaluating fairness and effectiveness; barrier and digital options; conflicts of interest and information flows; competition and market discipline; benchmarks; standards of market practice; responsibilities, governance and incentives and; surveillance and penalties.

The consultation document contains an array of statistical data and info-graphics. These include the efforts mounted by the CCP Research Foundation (which advocates using the fines imposed on rogue firms/banks as a metric to measure ethics and behaviour in the financial sector) and the FEMR recalls that between 2009 and 2013 the costs of misconduct total an estimated £160 billion. For the FEMR, the approach pioneered by Roger McCormick:

text4820could provide a framework for further development in relation to industry-wide performance measures relating to conduct.

Identifying a range of conduct related problems in connection to benchmark and other price manipulation, misuse of information, collusion, artificial restriction of physical supply to drive up prices, the FEMR emphasises that:

[B]enchmark manipulation has been the highest profile of all recent cases of market abuse in FICC markets. The attempted manipulation of Libor, Euribor and other interbank rates has affected every major financial centre, including London, Singapore, Frankfurt and Tokyo, and resulted in total fines on institutions of some £4 billion, by US, UK and European regulators. In addition, the FCA recently fined one firm £26 million for manipulation of the London Gold Fix, and another firm £70 million for attempting to manipulate the BBA Repo Rate benchmark in order to influence the fees payable to the Bank of England for liquidity support. These cases highlighted the susceptibility of some historic fixing processes to manipulation, but they also involved other forms of misconduct. For example, some cases involved inappropriate influence being exerted on Libor setters by their bank’s derivatives traders, who had incentives to attempt to move the fixing in order to profit from contracts referencing the benchmark.



2 responses

1 11 2014

Commenting on this reference in the FEMR Consultation Document , Roger McCormick observed (http://www.ccpresearchfoundation.com/noticeboard?item=25992-femr-consultation-document):

“It is very encouraging that the scope for using the Conduct Costs Project’s work to help with industry-wide conduct metrics has been recognised in a document emanating from the Bank of England, HM Treasury and the FCA. We have always been at pains to stress that our work is not a bank- bashing exercise but an attempt to develop a way of testing banks’ success in putting their houses in order and provide accessible data that indicate the progress being achieved. The ability to compare banks, jurisdictions, heads of loss as well as year – on-year figures is absolutely crucial for this.”

26 11 2015
Narratives of Misconduct: Emerging Trends in the Finance Sector | Global Corporate Law

[…] governor’s words chime with this July’s Fair and Effective Markets Review (FEMR, see here). Endorsing the FEMR the governor demanded a “better balance between individual and firm […]

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