Markets Standards Board Publishes First Draft of FICC Standards

The Financial Markets Standards Board
(FMSB), established in the wake of last years Fair and Effective Markets review
(FEMR) process in the UK, has published its first draft standard aimed at
improving conduct in FICC markets.

The FMSB’s work started last year and was
initially aimed at all FICC markets, however since the Bank for International
Settlements established
its FX Working Group
under chair Guy Debelle, the FMSB has deferred to it
in areas covering foreign exchange.

In a letter to the FEMR principles,
Elizabeth Corley, interim chair of the FMSB, explains, “
Prior to the establishment of the FMSB, work
had been started by the then FEMR Market Practitioner Panel FX Working Group on
guidance covering stop loss and hedging for stop loss. When the Bank for
International Settlements (BIS) set up its global foreign exchange working
group to produce a global foreign exchange code of conduct, the FMSB decided to
submit its working drafts to the BIS to avoid duplication and to support the
development of a global code.

“The FMSB welcomes the
publication of the first phase of the BIS Foreign Exchange Working Group’s code
of conduct in May,” Corley continues. “This is an important step in the
development of a global code to strengthen standards in the Foreign Exchange
markets and we strongly endorse this initiative.

“The FMSB continues to
engage with the BIS FX Working Group on a number of levels, including
representation on the Bank of England’s FX joint standing Committee,” she adds.
“This engagement also helps to identify areas of potential read across into
other markets.”

Mark Yallop is due
to take up the chair
of the FMSB in July.

Today’s standard,
which is being issued in draft form for comment, covers reference price
transactions in the fixed income rates markets. Fixed income reference price
transactions (RPT) involve agreeing all aspects of a transaction except price
which is set later based on a pre-agreed reference price.

RPTs are used by asset
managers because most of the main equity and bond index compilers use
end-of-period closing prices in their performance calculations, and so the use
of those prices in portfolio valuations and performance measurement is
widespread. For this reason, FMSB says, it is helpful for asset managers to
transact at the index closing price when making changes to a portfolio
benchmarked against an index. Trading at valuation points ensures that existing
fund holders are not disadvantaged when the funds from new investors are

Additionally, since
the difference between the execution and reference prices are agreed upfront,
some clients use RPTs to pass risk at a predefined spread to an observable
market level.

Liquidity can also be
aggregated at a pre-arranged time and venue, with RPTs employed to ensure that
risk is passed at precisely that time. For example, dealers commonly replace
the interest rate exposure disappearing when cash-settled swap options expire
at 11 am by paying or receiving fixed to other market participants earlier in
the morning via RPTs referencing the 11 am ICE Swap Rate.

Nine Core Principles
are published in today’s document. They are:

  • ·     
    The possible conflicts of interest inherent to RPTs should be managed
    by Dealers in a way that promotes the fair treatment of Clients and other
    market participants.
  • ·     
    Dealers should ensure that the Client is aware of the key mechanics of
    RPTs, in particular the fact that hedging can take place before, during or
    after the reference time, by making clear in its terms of business or otherwise
    by disclosure to the Client that the Dealer observes FMSB Standards, or by
    express disclosure in some other way.
  • ·     
    Dealers should ensure that their hedging is solely aimed at risk
    mitigation and isnever performed for the purpose of influencing or
    manipulating the reference price.

  • ·     
    Where hedging takes place at a portfolio level Dealers should ensure
    that the management of their aggregate positions is consistent with this
  • ·     
    Clients should not execute RPTs for the purpose of ultimately
    influencing the reference price, and should not attempt to influence the
    reference price during the hedging window.
  • ·     
    Information about an RPT should not be shared externally and only
    shared internally on a need to know basis, the policy for which should be
  • ·     
    Dealers should implement processes and record keeping to monitor RPTs
    to ensure compliance with this Standard. The systems should include an
    escalation process for addressing concerns identified by traders or their
    supervisors in connection with the trading and hedging of RPTs.  

  • ·     
    Firms should ensure that their personnel have been trained on the
    substance of this Standard and their responsibility to identify and escalate
    suspicious transactions internally.

“The new standard is
intended to give clear guidance to traders and market practitioners about what
is acceptable conduct in the context of these types of transaction and create
greater clarity about what good market practice looks like, and what types of
practice should be avoided,” says Corley.

The FMSB is issuing
the standard in draft form to provide an opportunity for public comment ahead
of final ratification and issuance. Submissions should be sent to by midday (12:00pm BST), Thursday 8 September,
. A final version of the standard will be published by the FMSB
after evaluating public comments.

The group says that
its sub-committees are currently working on standards in a range of other areas
such as commodity binary options and the new issue process in fixed income
markets. The binary options’ standard is due for publication in the next few
weeks, the group says.

The FMSB’s conduct and
ethics sub-committee is also doing work to assess formal wholesale FICC markets
training programmes undertaken by member firms as well as facilitated workshops
with surveillance representatives from FMSB member firms, focusing on the trade
lifecycle in foreign exchange. “The intention is to complete papers summarising
good practice in both these areas by the year end,” FMSB says.

The group adds that
its codes and standards convergence sub-committee has met with authorities in a
number of other countries to discuss international convergence of standards.

Twitter @lamboPnL


Colin Lambert

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