UK: Fair and Effective Markets Review publishes its final report

The Fair and Effective Markets Review (FEMR) has published its final report, setting out 21 recommendations to help restore trust in the wholesale Fixed Income, Currency and Commodity (FICC) markets.  The report follows the consultation which concluded on 30 January 2015.  The BoE has launched an open forum which will build on aspects of the FEMR report.

The recommendations are as follows:

Near-term actions to improve conduct in FICC markets:

1. Raise standards, professionalism and accountability of individuals:

1. Develop a set of globally endorsed common standards for trading practices in FICC markets, in language that can be readily understood, and which will be consistently upheld;
2. Establish new expectations for training and qualifications standards for FICC market personnel, with a requirement for continuing professional development;
3. Mandate detailed regulatory references (including information about misconduct, disciplinary actions, outstanding liabilities or complaints) to help firms prevent the ‘recycling’ of individuals with poor conduct records between firms;
4. Extend UK criminal sanctions for market abuse for individuals and firms to a wider range of FICC instruments (all those covered by MAR); and
5. Increase the maximum sentence for criminal market abuse from seven to ten years’ imprisonment.

2. Improve the quality, clarity and market-wide understanding of FICC trading practices

1. Create a new FICC Market Standards Board with participation from a broad cross-section of global and domestic firms and end-users at the most senior levels, and involving regular dialogue with the authorities, to:
   1. scan the horizon and report on emerging risks where market standards could be strengthened, ensuring a timely response to new trends and threats;
   2. address areas of uncertainty in specific trading practices, by producing guidelines, practical case studies and other materials depending on the regulatory status of each market;
   3. promote adherence to standards, including by sharing and promoting good practices on control and governance structures around FICC business lines; and
   4. contribute to international convergence of standards.

3. Strengthen regulation of FICC markets in the United Kingdom

1. Extend the UK regulatory framework for benchmarks to cover seven additional major UK FICC benchmarks — accepted and implemented by HM Treasury on 1 April 2015;
2. Create a new statutory civil and criminal market abuse regime for spot foreign exchange, drawing on, among other things, work on a global code (see recommendation 4.1);
3. Ensure proper market conduct is managed in FICC markets through monitoring compliance with all standards, formal and voluntary, under the Senior Managers and Certification Regimes (to include Conduct Rules, existing codes and output of the FMSB);
4. Extend elements of the Senior Managers and Certification Regimes (but not the presumption of responsibility) to a wider range of regulated firms active in FICC markets (MiFID investment firms, including asset managers and inter-dealer brokers; hedge fund managers under the AIFMD; and fund managers under the UCITS Directive); and
5. Improve firms’ and traders’ awareness of the application of competition law to FICC markets.

4. Launch international action to raise standards in global FICC markets

1. Agree a single global FX code, providing:
   1. principles to govern trading practices and standards for venues;
   2. examples and guidelines for behaviours; and
   3. tools for promoting adherence.
2. As part of that work, improve the controls and transparency around FX market practices, including ‘last look’ and time stamping;
3. Explore ways to ensure benchmark administrators publish more consistent self-assessments against the IOSCO Principles, and provide guidance for benchmark users; and
4. Examine ways to improve the alignment between remuneration and conduct risk at a global level

Principles to guide a more forward-looking approach to FICC markets:

5. Promoting fairer FICC market structures while also enhancing effectiveness, through:

1. Improving transparency in ways that also maintain or enhance the benefits of diverse trading models, including over-the-counter;
2. Promoting choice, diversity and access by monitoring and acting on potential anti-competitive structures or behaviour; and
3. Catalysing market-led reform (including the development of all-to-all venues and enhanced standardisation) held back by private sector co-ordination failures.

6. Forward-looking conduct risk identification and mitigation, through:

1. Timely identification of conduct risks (and mitigants) posed by existing and emerging market structures or behaviours;
2. Enhanced surveillance of trading patterns and behaviours by firms (possibly through pattern analysis, big data techniques, predictive coding and digitalisation of voice communications) and authorities; and
3. Forward-looking supervision of FICC markets (using information requests, attestations, thematic reviews, deep dives, skilled persons reviews, OIREQs/VREQs and OIVOPs/VVOPs).

This final report follows the consultation which concluded on 30 January 2015.  The Bank of England has launched an open forum to build on aspects of the FEMR report.  The FEMR'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.

In commenting on the report in his speech "Building real markets for the good of the people", the Governor of the Bank of England announced that "The Age of Irresponsibility is over."  He also confirmed that the Bank would be applying the core principles of the Senior Managers Regimes to its own senior staff, including the Governor.

Firms should be aware that the FCA's comment on the FEMR report contains the following admonition: "These recommendations do not change the FCA’s current rules; however, if you operate in FICC markets you may consider it helpful to review whether any of the findings or recommendations of the Review are relevant to your business".