On 27 October the Fair and Effective Markets Review (FEMR) published a consultation document outlining high-level policy proposals aimed at reinforcing confidence in the fairness and effectiveness of the Fixed Income, Currency and Commodities (FICC) markets, including associated derivatives and benchmarks.

Background to the FEMR
The FEMR was established by the Chancellor of the Exchequer and the Governor of the Bank of England in June 2014 to conduct a comprehensive and forward looking assessment of the way wholesale FICC markets, both regulated and unregulated, operate, to help to restore trust in those markets in the wake of a number of recent high profile abuses, and to influence the international debate on trading practices.

Focus of the review on FICC markets
The FEMR is seeking to assess the areas where fairness and effectiveness are currently perceived to be deficient; the extent to which ongoing regulatory, organisational and technological change that has taken place since the financial crisis is likely to address these deficiencies; and what further steps are needed to help ensure fair and effective FICC markets.

The Consultation paper sets out the review’s current perspective on the meaning of ‘fair and effective’ markets and focuses on a core range of high priority actions addressing the most critical sources of vulnerability across these markets. This includes identifying the potential solutions from; i) a structural perspective (market microstructure; competition and market discipline; and benchmarks); and ii) a conduct perspective (standards of market practices; responsibilities, governance and incentives; and surveillance and penalties). The review is also seeking responses to identify potential areas of vulnerability not covered by the Consultation paper.

The review further aims to identify the appropriate fora for change, whether at industry level, the UK authorities, or at an international level.

Indicative proposals
The Consultation paper already indicates possible policy proposals:

  • To improve market structures, possible actions include industry-led standardisation of more FICC products; initiatives led by the market or public authorities to improve transparency, for example through greater use of electronic platforms; removing barriers to entry for new trading platforms; enhancements to market-driven competition; industry-led improvements to benchmark design; and steps to encourage greater compliance of benchmarks with international standards.
  • To improve conduct, possible actions include developing a global code (or codes) of conduct for FICC markets, written by the market in terms that market participants understand; bringing trading in certain FICC markets more fully into scope of regulation; further steps to strengthen the translation of firm-level standards into more effective control and incentive structures; stronger tools for ensuring firms’ hiring and promotion decisions take due account of conduct; greater use of electronic surveillance tools by firms; ways to strengthen the role of the board; and stronger penalties for staff breaching internal guidelines.

Key considerations
Firms need to give careful consideration to the review given its implications for the future direction policy in the UK and potentially globally as well. However, as the Consultation paper notes, the process needs to be set in the context of ongoing change.

  1. Existing regulatory initiatives which overlap with the scope of the review will have to be taken into account by the FEMR when it produces its final recommendations. For example, the Senior Manager and Certification (“SMC”) regime is already directly responding to the review’s questions over the fitness and propriety of staff and the culture in a large section of the FICC market, but not all of it. A key question for the remaining market participants is how the effect of the SMC could be achieved without imposing its significant costs on small market participants. Some of the market structure initiatives are likely to form part of other upcoming regulatory changes, including MiFID II.
  2. The ability of the UK to implement the results of FEMR nationally within the context of the EU regulatory agenda is uncertain. The EU is completing a single supervisory rule book for banks while the new EU Commission’s proposed Capital Markets Union will, amongst other things, complete the single rule book for capital markets, potentially with consequences for market structure.
  3. The focus in the review on conduct culture in unregulated markets already forms part of the evolving role of the Compliance function. Supervisory approaches to risk are moving well beyond compliance with the letter of regulation to judgement-based supervision, placing much greater emphasis on the behaviours that underpin compliance, including ethics, integrity and culture and the outcomes they produce.
  4. The Consultation paper considers greater use of industry-developed standards, while noting the tension involved in making such standards relevant and enforceable.

Given the broad scope of the consultation and the overlap with ongoing regulatory workstreams the indicative policy proposals contained in the consultation are likely to evolve in content and importance over the course of the FEMR.

Next steps
The FEMR is seeking views on further steps that might be needed to help boost fairness and effectiveness in particular FICC markets. Responses to the consultation document are sought by Friday 30 January 2015. The FEMR will publish its recommendations in June 2015.


Manmeetrana_0070Manmeet Rana, Senior Manager, Capital Markets Regulation
Manmeet has more than nine years of capital markets focussed regulatory consulting experience, covering regulatory change, including MiFID II, compliance and conduct risk management. She has extensive experience of providing senior briefings, compliance effectiveness reviews, as well as tailored regulatory change implementation projects, working with a range of wholesale firms.

Tim Rawlings0032Tim Rawlings, Assistant Manager, EMEA Centre for Regulatory Strategy
Tim has a Capital Markets portfolio with a current focus on derivatives reforms, the Capital Markets Union, market infrastructure and securities financing transactions. Tim has been with Deloitte for three years and holds a master’s degree from the London School of Economics.


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