It was recently announced (here) that the Bank of England, the Financial Conduct Authority (FCA) and HM Treasury have published the final report on the Fair and Effective Markets Review. This report follows a comprehensive investigation into the fixed income, currency and commodities (FICC) markets, aimed at identifying the causes of misconduct in the markets, assessing the impact of regulatory reforms, and making recommendations on improvements to be made.  

At over 100 pages long, the recommendations of the report are wide ranging and could have a significant impact on organisations operating in FICC markets. The financial and regulatory teams at Lewis Nedas have conducted an extensive review of the recommendations of the Fair and Effective Markets Review, and give an overview of some of the main findings of the report in this blog post.

What is the purpose of the Review?

As mentioned above, the review was conducted in the hope of identifying the causes of misconduct by organisations operating in the FICC markets. It is also hoped that the report’s recommendations will help to close gaps in the regulatory landscape, reducing the opportunity for organisations working in these markets to misbehave.

What are the main recommendations of the Review?

The report contains 21 recommendations some of which, if implemented, could have a significant impact on the way that organisations working in the FICC markets operate. Some of the main recommendations of the Review are as follows:

1. Extending the reach of the Senior Managers and Certification Regime

The report found that there was some merit to extending the number of individuals that are governed by the Senior Managers and Certification Regime (SMR). Under the current rules, certain individuals, including interdealer brokers and asset managers, fall outside the SMR. As a result, regulators are currently unable to hold these individuals personally responsible for breaches of conduct rules. The Review recommends a consultation to be undertaken to extend certain parts of the SMR, to cover at least those active in FICC wholesale markets.

Any extension of the SMR would obviously increase the personal responsibility owed by senior personnel operating in the FICC markets. However, there is still further guidance required on precisely which individuals within an organisation will be governed by the SMR, and what activities will be covered by the extended regime.

2. Creation of a new FICC Market Standards Board

Another recommendation of the Review was to create a new body charged with identifying emerging risks to the FICC markets. Another important part of the FICC Markets Standards Boards’ role will be to tackle uncertainties in trading practices and to provide practical guidance to those working in the markets, allowing them to meet the standards that are expected of them. It is also hoped that the Board would be able to contribute to the harmonization of market standards on a global scale.

The creation of this body and its potential usefulness to those working in the FICC markets will ultimately depend on how well it is to be resourced. Assuming that, if it is created, the Board is given the necessary tools to perform its duties, it could prove useful in acting as a forum for discussion between regulators and individuals/organisations working in the FICC markets. Furthermore, the Board would need to be effective in providing guidance to markets in a timeous manner where uncertainty regarding market practices arises, lest it simply become a burden on them and becomes an obstacle to effective market practices.

3. Greater emphasis on conduct risk management

The report recommends a number of steps, for both regulators and participants in the FICC markets, to better manage risk in the future. These include:

• Greater scrutiny of FICC market structures and behaviours for potential conduct risks: the report points to the role that market participants have in being active in FICC markets and for the need for them to be conscious of their use of increasingly sophisticated technology, and the potential risks this creates for seemingly unrelated aspects of their business.

• Identification of potentially inappropriate trading patterns through market surveillance: emphasis is placed on organisations operating in the FICC markets, and the need for them to use sophisticated technology to analyse trading patterns. The report also highlights the importance of organisations reporting questionable behaviour to the regulatory authorities at the earliest opportunity.

• Encouragement of forward-looking supervision: it is suggested that senior personnel within organisations make use of the SMR regime, combined with regulatory bodies taking a more comprehensive approach to using their regulatory powers to police questionable activities in the markets.

An emphasis on improved risk management is admirable but also has inherent challenges. In order to be achievable, more successful risk management must be supported by sophisticated systems that will require significant investments in time and money to be effective.

The recommendations of the FEMR are ambitious and if fully implemented, could have a significant impact on market participants in the FICC sphere. In the near future, it is likely that further consultation will be undertaken, to establish when and how the recommendations outlined in the FEMR can be implemented, and how market participants will be able to adjust to their new regulatory environment. A report on the progress of the implementation of the FEMRs’ recommendations is scheduled to be complete by June 2016.

Contact our Regulatory and Financial Lawyers London

At Lewis Nedas, we are acutely aware of the challenging regulatory environment that financial organisations operate in. If you are concerned about the recommendations made by the FEMR, or how the obligations that your organisation owes to regulators may change, speak to us today. The lawyers at Lewis Nedas are some of the most experienced in their field, who understand clients’ need for comprehensive, practical legal advice. Our regulatory and financialinancial lawyers will be following the progress of the FEMR closely, and will be able to give comprehensive advice on how it will impact you and your organisation. Contact us today and see how we can help you.