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FICC: no one reg to rule them all, but a Board?

On 10 June 2015, the Fair and Effective Markets Review (“FEMR”) published its Final Report on the Fixed Income, Currency and Commodities (“FICC”) markets.

The Review was launched in June 2014 to cover the following areas:

·         Trading practices

·         Scope of regulation

·         Impact of recent and forthcoming regulation

·         Supervision

As an interim output in August 2014, the Review delivered its Recommendations on additional financial benchmarks to be brought into UK regulatory scope, further to which seven benchmarks joined LIBOR as UK regulated benchmarks[1]. This is perhaps the most tangible achievement of the Review to date.

In contrast, the Review`s Final Report appears diffuse as it aims to capture the complexity of the international FICC markets along with the multi-faceted ongoing regulatory responses, international standards and complementary market-owned initiatives.

FICC markets are at the crossroads of key legislative developments at the EU level, including European Market Infrastructure Regulation (“EMIR”),  Market Abuse Regulation (“MAR”), Markets in Financial Instruments Directive (“MiFID II”) and the upcoming EU regulation on benchmarks scheduled to enter trilogue discussions in June 2015.

The Review makes a number of gold-plating recommendations for the UK.

As MAR does not extend to spot FX as an asset class or certain OTC trades, secondary legislation might be enacted to fill the gap. The UK criminal sanctions framework could be extended: maximum sentences might be lengthened from seven to ten years and a wider range of FICC instruments might be covered.

The Review recommends widening the scope of the joint PRA/FCA Senior Managers and Certification Regimes and Conduct Rules[2], as a significant number of FICC market participants are not covered by the rules. In addition, the Regimes could be tweaked to give “teeth” to non-statutory market codes and guidelines such as the March 2015 global preamble to national FX codes, the relevant national FX codes, the standards developed by the BIS, FSB and IOSCO, but also the standards as formulated by a new market-owned body which could be created in the UK, the FICC Market Standards Board (“FMSB”). The traders and other relevant individuals might become personally accountable for a breach.

The Board would face the challenging task of giving life to existing and future standards by way of guidelines and case studies, ensuring a proper representation of FICC market participants, both domestic and global, and maintaining a regular dialogue with the relevant regulatory authorities.

The Review will provide a full implementation update of the recommendations by June 2016.

[1] Discussed here Seven benchmarks to join LIBOR on the hot seat
[2] www.fca.org.uk/static/documents/consultation-papers/cp15-09.pdf
www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp715.pdf
www.fca.org.uk/static/documents/consultation-papers/cp14-13.pdf
www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp2614.pdf

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