• An “ethical drift” in the FICC markets led to the Review.
  • The Review produced 21 recommendations with potential impacts on international and local regulatory authorities, firms and individuals.
  • The Review has stressed the importance of individual accountability, firms collective responsibility, closure of regulatory gaps and co-ordinated international action.
  • The wide ranging recommendations affect market structures, remuneration, criminal market abuse sanctions and the senior managers regime, which would be extended beyond banks and insurance companies.

Introduction

The Bank of England, HM Treasury and Financial Conduct Authority published the Fair and Effective Markets Review final report on 10th June 2015. This report set out what the Review believes needs to be done to reinforce the confidence in the fairness and the effectiveness of the Fixed Income, Currency and Commodities (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.

How important are the FICC markets?

The Review identified the fact that the UK is responsible for 40% of foreign exchange trading volumes, half of all trades in over the counter (OTC) interest rate derivatives and more than two thirds of trading in international bonds.

Review outcomes

The lack of firm governance and controls, acceptable standards of market practice and a culture of impunity contributed to a process of ‘ethical drift’ leading to huge fines, reputational damage, diversion of management resources and the reining in of productive risk taking. The recommendations are aimed at restoring trust and fairness in the FICC markets, while boosting their overall effectiveness.

The Review contains the following six broad policy recommendations:

  • 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.

It also contains a further 21 recommendations which are likely to have an impact on individuals, firms, UK regulatory authorities and international authorities in various ways which include:

Individuals

  • Developing a set of common standards for trading practices applicable across all FICC markets.
  • Extension of criminal sanctions for market abuse from 7 to 10 years imprisonment.
  • Mandating qualification standards.

Firms

  • Creating a new FICC Market Standards Board to address areas of uncertainty in trading practices and promote adherence to standards.

UK authorities

  • Extending elements of Senior Manager regime and Certification regime to wider range of FICC activities.
  • Creating new statutory and criminal market abuse regime for spot foreign exchange.

International authorities

  • Agreeing a single FX code providing a comprehensive set of trading principles to govern trading practices around market integrity, information handling/
  • Examining ways to align remuneration and conduct risk at a global level.

How will your firm respond to the Review’s recommendations?

The impact of the recommendations will be keenly felt as the regulator will be looking for its first enforcement action for any transgression. These recommendations will change the way firms and individuals operate in the markets.

The Review’s recommendations, although local and global in nature, are of the utmost importance. In order to maintain momentum an Open Forum will be held in autumn of 2015 to discuss the report recommendations with a broad range of stakeholders. An update is to be provided to the Chancellor of the Exchequer and Governor of the Bank of England by June 2016 of the programme parts under UK control, alongside this international discussions will commence.