Trading codes of conduct: going global

By DavidClark, chairman, the Wholesale Markets Brokers’ Association (WMBA)

The Fair and Effective Markets Review (FEMR),a joint initiative launched by the UK Government Treasury and the Bank ofEngland aimed at rebuilding trust and restoring confidence in the wholesalefixed income, currency and commodity markets (FICC) is playing a key role in influencingthe international debate on trading practices. It is the first time that a governmenttreasury, regulator and central bank have worked together to address what wentwrong through stronger conduct and behavioural standards. As the Review and theprinciples outlined within it gain traction to become a global blueprint, thisarticle considers the reasons behind its success, and what considerations mustbe made by regulators around the world in adopting its principles to ensure theypromote truly global standards and practices.

Why was FEMR so successful and how can itsendorsement of codes of conduct be applied on a global basis?

Unlike various regulatory initiatives suchas the Markets in Financial Instruments Directive (Mifid) and the Dodd-FrankAct, among others, FEMR’s success is due in large part to its ‘bottom-up’approach whereby market participants have been working collectively not only toanswer the UK authorities’ questions about what fair and effective marketsshould look like but come up with suggestions to ensure past failings andinappropriate behaviour are not repeated. The engagement of practitioners aspart of the solution has been key to its success. The Market PractitionersPanel (MPP), comprising of senior industry leaders representing the buy-sideand sell-side, market infrastructure providers and corporate users, enabled asmany market participants from the broadest spectrum possible to provide inputto the Review. 

Another important change introduced by the PrudentialRegulation Authority (PRA) and the Financial Conduct Authority (FCA) alongsidethe FEMR was the extension of the existing Senior Managers Regime to encompass non-banks,including building societies, credit unions and investment firms to ensure thatsenior managers can be held accountable for any misconduct that falls withintheir areas of responsibilities. A new Certification Regime and Conduct Rulesto hold individuals working at all levels in banking to appropriate standardsof conduct were also implemented.

Lastly, it was widely acknowledged thatabuses took place because of bad behaviour and governance but, interestingly,another feature of the review unearthed that standards of market practice werepoorly understood, were short on detail or lacked a common approach. To use theFX market as an example, a number of practices including last look,internalisation and time stamping are currently being reviewed in furtherdetail to ensure that practitioners do not intentionally or indeedunintentionally abuse these normal trading practices. 

Why should FEMR become global and whatprogress has been made?

With Londonbeing the leading centre for global capital markets across the world, thegeneral consensus is that what’s beneficial for London is beneficial for therest of the world and, as such, it is believed that the international promotionof the Review is a prerequisite for its success and a contribution to theintegrity of global traded markets. A strong argument for this bottom-up approachcan be found in the FX market, which in March 2015 saw eight foreign exchangecommittees jointly publish a high-level set of conduct principles that shouldbe expected of all participants. The document, Global Preamble: Codes of BestMarket Practice and Shared Global Principles, aims to harmonise behaviouralstandards internationally.

Shortlyafterwards, the Bank for International Settlements’ (BIS) Foreign ExchangeWorking Group (FXWG), was asked to strengthen the code of conduct standards andprinciples in the FX market. To support the FXWG, a Market Participants Group(MPG) was established, consisting of market participants from the sell-side andbuy-side of the market as well as FX infrastructure providers. Together, thetwo groups will work with the various global foreign exchange committees toreach out to jurisdictions beyond those represented by the group.

Whatare the challenges?

As the risk of regulatory fragmentationincreases, there is pressure on jurisdictions to deliver a supervisory systemwhich recognises the values of adhering to a global code of conduct and implementingbest practice guidelines. Undoubtedly those jurisdictions which have alonger standing history of understanding the principles of a code of conductwill have an advantage in adopting the principles of this Review. It has beenacknowledged, however, that the more specific the guidelines, the taller thebarriers to compliance will become. It is impossible to define every scenariothat is or is not in breach of a set of guidelines, and so it is hoped that aglobally agreed code of conduct can help market practitioners reach their ownconclusions about what type of behaviour is appropriate and how to propagate itin their institutions.

It should be noted, however, that thesuccess of a global code of conduct rests heavily on the ability to enforcebetter behaviour among practitioners without making major changes to the marketstructure that could have an adverse effect on liquidity and access. The movetowards using a code of conduct as a supervisory tool also further supports theemphasis now being put on principles based regulation.

Furthermore, theproposed global code of conduct does pose the question about how the commodityand energy markets will be regulated as some jurisdictions do not classify commoditiesas a financial asset class and would not therefore apply the code in the way itis done so by FEMR, creating discrepancies which will affect the way theseinstruments are traded. Regulators therefore need to look at this issue in awider context before a global code and principles based regulation can be appliedto these instruments and adhered to on a global scale.

Whatnext?

Great progresshas been made in rolling out the recommendations of the Review on a globalscale, particularly as regards the promotion of a single code of conduct butfurther work is needed. Regulatory authorities in the UK and beyond continue toconsult with the market in this regard but there is a widely held view thatlittle more can be done to enforce a set of principles upon the market andcoerce participants to behave accordingly. Ultimately it is the responsibilityof the latter to make it succeed. 

What does regulatory reform mean for how you do business? Find out at FOW's Regulation 2015 event in London on 8 September, sign up now: http://bit.ly/Regulation2015