HM Treasury, the Bank of England and the Financial Conduct Authority have delivered the final report on the Fair and Effective Markets Review (FEMR), a broad and comprehensive analysis of the fixed income, currency and commodities (FICC) markets. The review seeks to identify the root causes of the recent misconduct and other sources of perceived unfairness in FICC markets, evaluate the impact of regulatory reforms, and make recommendations to fill the remaining gaps.

The report contains a total of 21 recommendations, some of which have the potential to dramatically affect market participants, particularly the extension of the Senior Managers and Certification Regimes (SMR) and the introduction of a FICC Markets Standards Board.

The recommendations are based on six broad principles, listed below:

  1. Individuals held accountable for their actions;
  2. Collective responsibility for firms in developing and complying with standards of market practice;
  3. Broadening the regulatory perimeter, holding management to account and toughening sanctions for misconduct;
  4. International coordination and convergence;
  5. Promoting fairer and more effective FICC markets; and,
  6. Taking a forward looking approach to identifying and managing conduct risk.

The recommendations include, inter alia, extending the criminal and civil sanctions for market abuse to FICC markets, the creation of an FICC Markets Standards Board, common international standards for trading practices, a global FX code of conduct, and the introduction of mandatory regulatory references when employees move firms. Set out below is additional detail on some of the key recommendations and themes of the final report.

Individual accountability

As expected, the report places significant emphasis on individual accountability for persons participating in FICC markets, partly driven by concerns that “firms might increasingly treat fines as costs of doing business”. It recommends extending “elements” of the SMR to “firms active in FICC markets”. This would widen the range of firms subject to the regime, but it would not apply all of the requirements of the SMR. For example it would not extend the presumption of responsibility, under which Senior Managers are held accountable for regulatory breaches in the areas they are personally responsible for unless they can satisfy the regulator that they took reasonable steps to avoid the breach.

It is not yet clear how “firms active in FICC markets” will be defined. While the report indicated that this would include inter-dealer brokers and asset managers, there is uncertainty over whether this would be a blanket inclusion of all, e.g., asset managers or whether “active FICC firms” would be defined more narrowly. In addition, by extending elements of the regime to FICC firms rather than the full SMR, some firms will be covered by this ‘reduced’ framework, while others (e.g. the most senior personnel in banks) will still be covered by the ‘full’ SMR.

Extending the SMR will clearly increase personal accountability for top executives (both in the UK and potentially overseas) in active FICC firms, but the extension of the Certification Regime will come with significantly higher compliance costs especially for small firms. Deciding which firms to bring within this wider scope will be challenging especially as it is likely that a large number of firms are “active” in FICC markets even where this forms an ancillary aspect to their business.

The proposed extension of the Certification Regime will present individual firms with their own scoping challenges. What activities are covered by which staff? Who are their customers and where are they located? These questions will need to be answered if firms are to identify all the individuals covered by the extended Regime.

FICC Market Standards Board

The proposed FICC Markets Standards Board (FMSB), modelled on the Takeover Panel, will be tasked with identifying emerging risks in FICC markets, addressing uncertainty in trading practices and providing practical guidance on implementing codes of conduct, promoting compliance with codes of conduct and best practice, and contributing to global efforts on the convergence of standards.

Depending on the final scope, make-up and resourcing of the FMSB, it has the potential to enhance compliance through an “effective but proportionate standards regime” and increased dialogue between the markets and regulators. Perhaps of greatest utility, the FMSB will provide a forum to address uncertainty in codes of conduct, and to translate what the codes mean for day-to-day trading, e.g. through case studies. This role may provide some comfort to those individuals subject to the ‘reduced’ SMR by helping address any ambiguities from the standards to which they will be held to account. For the FMSB to be effective it will need to be able to identify and resolve issues and uncertainty in a timely manner, since in such rapidly evolving markets any delayed response could have significant consequences.

The report sets out criteria for the make-up and membership of the FMSB that will relieve concerns that it could be dominated by a small group of market participants. Membership will be drawn from across the market and avoid dominance by one group, members must have sufficient authority to apply the FMSB’s outputs within their firm, and members of the panel and the secretariat must be experts in their field.

As noted above, the extension of the SMR and the FMSB, in particular, have the potential to have a dramatic impact on FICC markets. It will also be interesting to see how the dynamics between the two recommendations develop as they also have the potential to be self-reinforcing. The membership requirements of the FMSB suggest it will include senior representatives from firms, who are also likely to be in senior management functions (SMF) under the SMR. The new accountability arrangements will give “greater teeth to voluntary market codes” – a factor not present in other jurisdictions – this in turn will incentivise senior individuals to engage with the FMSB to help develop workable, clear and enforceable standards to which they will be held to account. However, the regulators will also need to take a view, and engage in regular dialogue with the FMSB, on what constitutes “proper standards of market conduct” and whether the outputs from the FMSB are sufficiently rigorous to meet this need.

Conduct risk management

As expected, there is a lot of focus in the report on conduct risk management, for example the implementation by firms of new monitoring tools for surveillance of trading patterns and behaviour. Together with competition, these themes have been high on the FCA’s agenda for some time. They look set to gain more attention at the EU and international level, especially given the work announced by the FSB on conduct risk and Commissioner Lord Hill’s recent speeches on competition, choice and transparency.

Implementing conduct risk management frameworks, supported by appropriate conduct risk management information, to achieve the outcomes envisaged in the report will require significant investment, not least in technology to overcome issues around data. Having these systems in place will also be important to support individuals covered by the SMR, so that they can discharge their duties under the regime.

Global outlook to regulation

The report reflects the global reality of FICC markets and the recommendations are designed to recognise the importance of a global attitude to regulation. For example, the FMSB “should aim to have international reach”. The report proposes roles for the International Organisation for Securities Commissions (IOSCO), the Financial Stability Board (FSB) and the Bank for International Settlement (BIS) to develop international standards e.g. on trading practices, processes for self-assessment against benchmark principles, aligning remuneration and conduct risk, and a single global FX code - building on the FSB Foreign Exchange Benchmark Group.

Achieving international convergence will not be an easy task and some recommendations will be simpler to achieve than others. Recent developments, for example in the FX Working Group at the BIS, have shown that regulators are willing to work more closely on regulation in FICC markets, but it is too early to say how this will be translated into practice. Mark Carney, as Chair of the FSB, is well placed to promote the FEMR to international organisations and other key regulators for FICC markets.

Forward-looking approach

Principles 5 and 6 in the report are focused on delivering a more forward-looking approach to regulation and conduct in FICC markets. This is in recognition of the significant regulatory change that is ongoing and may change the dynamics of the market, and the pace of innovation in these markets. Trading practices and business models will change as regulation comes into force, so there is need for a mechanism to identify risks and maintain standards of conduct as the markets respond to regulation. The FMSB will play a central role in this, but it will also require transparency and surveillance of trading patterns, stable market infrastructure and a forward-looking mind-set from supervisors.

What next?

The recommendations are ambitious, not least with respect to the global outlook, and if fully implemented, will have a significant impact on FICC markets and market participants, e.g. through the wider scope of SMR style arrangements. It will take time to fully analyse and understand the impact of the report and its recommendations. On some aspects additional detail is required before the implications can be understood, for example the extended scope of the SMR.

Among the areas we expect market participants to focus on are:

  • Which firms and hence which individuals will be covered by the extended SMR;
  • Implementing monitoring and surveillance tools to manage conduct risk; and,
  • Reviewing benchmark remediation programs in light of the FEMR findings.

While many of the domestic provisions are likely to be implemented in the near-term, recommendations requiring input from global bodies will take much longer. Firms should not see the final report as the end of FEMR. In many respects it looks more like the beginning. Firms should expect to see consultations on proposed rules start to be released which they will need to engage with and prepare to implement. A review on the progress of implementation will be produced in June 2016.


Tim Rawlings
Tim 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, securitization, securities financing transactions and collateral. Tim is a Chartered Accountant (ACA) and holds a master’s degree from the London School of Economics.

David Strachan
David Strachan - Partner & Co-Head, EMEA Centre for Regulatory Strategy

David is Head of Deloitte’s EMEA Centre for Regulatory Strategy. He focuses on the impact of regulatory changes - both individual and in aggregate - on the strategies and business/operating models of financial services firms. David joined Deloitte after 12 years at the FSA, where in his last role, Director of Financial Stability, he worked on the division of the FSA into the PRA and the FCA.

Stephen Farrell1
Stephen Farrell - Director, Assurance Practice

Steve is a Director in Deloitte’s Banking & Capital Markets Audit group, who has a thorough technical understanding of financial benchmarks, financial instruments, and capital markets control practices. Steve leads the Firm’s assurance engagements in respect of controls and processes supporting compliance with Market Abuse Regulations, and is have been heavily engaged in remediation across the FICC markets for a number of years.  

Mark Cankett
Mark Cankett - Director, Banking & Capital Markets Audit

Mark is a Director in the Banking & Capital Markets Group at Deloitte and has a key leadership role in Deloitte’s Financial Services Disputes team. He has recently worked on an FX investigation at a major bank as part of its response to global regulatory probes and is currently assisting a number of banks with reform of their FX and wholesale markets businesses



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