The Market Practitioner Panel (MPP) has warned of the challenges inherent in reforming the fixed income, currency and commodities (FICC) markets, and says enhancing fairness and effectiveness will require a coordinated, concerted and sustained response by the industry, working together with policymakers and regulators on a continuing basis.
The independent body, formed as part of the UK’s Fair and Effective Markets Review, revealed its responses to the review, saying they represented the collective opinion of senior industry leaders from investment banking and asset management firms, market infrastructure providers and corporate users.
A senior industry commentator tells Profit & Loss that the MPP response could prove a key indicator of the direction the review’s findings may ultimately take due its unique position within the process itself.
According to the MPP, the issues arising from the Libor and FX benchmark abuses are conduct related, rather than structural. It adds the actions of individuals in the Libor and FX abuses were “totally unacceptable” even in the absence of clarity over standards of acceptable market practice.
It also notes there are further "grey areas" across FICC wholesale markets where some uncertainty remains over what constitutes acceptable market practice that are not covered by the FEMR consultation document. It warns, however, that any intervention aimed at improving fairness and effectiveness in the sector needs to take into account the global nature of the markets.
The group says that three recurrent themes emerge from its work in response to the consultation. First is the need for clear, consistent and sufficiently practical guidelines on acceptable market conduct, including in specific areas where there is still divergent practice, and to translate these into straightforward language and examples that can be understood by all relevant employees.
The second theme is the need to establish more consistency in conduct codes and standards applied across and within firms to ensure exemplary behaviour by all individuals; and the third focuses on the requirement to find a means to capture and share best market practices as they evolve.
It calls for constant reviews going forward as “new practices will develop, innovations will arise, new venues will emerge and new instruments will be created, which will trigger unanticipated issues”.
“The heterogeneity of FICC markets is a further challenge to be overcome,” it adds.
Although some market participants would welcome very definitive rules (as opposed to principles and standards), the MPP says it believes it may be virtually impossible to envisage a sufficiently detailed and comprehensive rule book for FICC wholesale markets that would remain current and precise, without considerable and constant dedication of expert resources.
But as the MPP adds: “Does this mean that the drive for enhanced fairness and effectiveness should be consigned to the ‘too difficult box’? Absolutely not.”
In terms of the future developments in the market itself, the group notes that many market participants prefer the principal-to-principal model despite the “potential conflicts of interest”.
However, it also says it recognises the importance of choice and therefore encourages the development of agency-only order-matching alternatives where demand exists, despite many agency-only models having been tried with only limited success. Instead, it calls for the creation of effective "order matching models", which will require collective and communal action between market participants to "kick-start" such initiatives.
The MPP also recognises the concerns of some market participants and regulators about the potential for last look practices to be misused.
Some MPP members emphasise the benefits of last look practices to market efficiency, stating that it provides market makers with an effective mechanism to manage both latency and counterparty credit risk, but some consider that it should be phased out, even at the risk of spreads widening, as last look is not a common practice on all markets.
“The MPP acknowledges the potential for abuse which needs to be prevented,” it says. “In order to mitigate the possibility of abuse occurring, the MPP recommends the development of FICC codes and standards and guidelines…For last look, guidelines would outline disclosures to be made to counterparties, such as explaining the market maker’s last look privileges and the associated benefits and risks involved.
“It should also be explored whether and how clients/end-users who conclude they might have been subject to abuse can escalate their concerns within firms and ultimately to the regulator,” the MPP adds.
FEMR plans to make its final recommendations in June 2015.
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