At the request of the European Central Bank, Heering Ligthart, president of ACI – The Financial Markets Association, recently made a presentation to the FX Contact Group in Frankfurt, which is comprised of representatives from the 20 largest FX banks in Europe, plus representatives of the 12 central banks within Euroland. Ligthart introduced the ACI Model Code and made headway in terms of starting a discussion about the Model Code being used as the benchmark for the Euro-marketplace.
His presentation outlined what ACI is trying to achieve in terms of the Model Code, the ACI examination suite, as well as its arbitration services. The ECB was represented by Francesco Papadia, Werner Studener and Roberto Schiavi, while a dinner afterwards was hosted by Sirrka Hamalainen, executive director of the ECB and the former Governor of the Central Bank of Finland.
“Over recent years, we have experienced growing interest from an increased number of regulators in the various sectors of the international financial markets. The integration of the various activities in our markets into one marketplace and the globalisation process as such, are creating a major challenge to regulators and the industry itself,” said Ligthart.
WHERE DOES THIS LEAVE ACI?
“There is a firm belief in our organization that an accreditation process for our markets is going to happen sooner or later. It already occurs in certain countries and this whole process will accelerate,” he said.
However, before any accreditation process can start, a number of issues must be first addressed. These issues are:
“There has to be benchmarks for the quality of market participants that do recognise their theoretical skills. Therefore, they need to be trained to get to know the products, which are available in the market (FX and money markets) including the derivatives related to those markets. They require a basic understanding of risk management; they need a working knowledge about operational and back office activities; and must be aware of the Code of Conduct and best market practice,” Ligthart said.
All these subjects have to be dealt with and market participants should be required to sit and pass an examination to prove their skills, he added. The major question for local regulators is how to deal with truly global markets.
“Global markets mean global standards, but regulators also have to define their own local market conditions, also taking these into consideration,” he said.
“All training and education efforts seem to focus on front office staff. Bearing in mind that daily turnover in the FX market is still approximately $1 trillion, it seems more than obvious that regulators should also pay attention to the quality of back office staff and standards should be defined to include them,” he said.
THE MODEL CODE
Market behaviour and being aware of best market practice is at least as important as training and education. “Ethical standards are an important part of any accreditation process,” said Ligthart. “With the rapid development of electronic trading systems, e-commerce and the further liberalisation and globalisation of all financial markets, the need to keep a high ethical level is extremely important.”
“Also in this case, local regulators are faced with a dilemma – to what extent are their markets globally orientated and need global standards, and to what extent locally orientated with local standards?” he queried.
How difficult it can be for regulators is shown in the UK, where the London Code of Conduct requires that employees are trained in market practices, but there are no examination requirements, he said.
For a smooth functioning of the markets, there is a need for a body, which should be able to provide expert advice whenever a dispute arises between market participants. This is very complementary to defining best market practices, accreditation and the Model Code, he said.
“Apart from this advisory function, we can also provide ‘expert witness’ testimony in court,” he added. “Although not binding, in our past experience we found that market participants do take our advice very seriously and normally accept it.”
“Last year we accepted the principle that as ACI – The Financial Markets Association, we are obliged to offer these services to non-members, as well as to our members,” he said. “With these services, we do not try just to protect our members, but we try to protect our markets whatever the out-come for our members might be.”
As far as regulation is concerned, the present situation is very complex, he continued. In some countries, the financial institutions are regulated by the central bank or an independent regulatory body. In other countries, the central bank is in charge of the monetary policy while another body is responsible for supervising banks and all kinds of other institutions and market related activities. Sometimes there is more than one supervisory body in the same country.
There is a similar situation regarding accreditation, he added. “Market participants in a growing number of countries need to be officially accredited by a regulatory body in each country before they are allowed to deal (in particular, those operating in the various retail markets and the securities industry are supervised). Market participants active in the professional wholesale markets, and not active in the securities industry, need to be accredited in a few but growing number of countries, a process which will accelerate within the next couple of years,” he said.
The standards and criteria used for accreditation by the regulators in countries vary from one country to the next. “Regional standards might be used, but all in all, there are no global standards,” Ligthart said. “Being officially accredited in one country does not mean that the professional market participant has the same status in another centre. This situation creates unnecessary confusion among market participants and banks operating internationally.”
“Cross-border mergers of financial institutions, the abolition of the Glass-Steagal Act in the US and the fast growing role of e-commerce will add further pressure on regulators and the industry alike,” Ligthart said.
“However, within globally operating markets, all market participants would like to have – and should have – a level playing field. Everybody should be able to operate under the same professional conditions leading to greater transparency and fairer competition,” he added.
ROLE OF ACI
Ligthart continued: “As ACI – The Financial Markets Association, we can offer the following to the regulators and to the markets:
International benchmarks for quality through our set of examinations (The ACI Dealing Certificate, the ACI Settlement Certificate and The ACI Diploma) and regulators might add local requirements to these benchmarks or use it as the only benchmark.
The new Model Code, launched in Paris, replaces the former ACI Code and has been developed using the old Code plus the codes of the major financial centres also in co-operation with the various FX Committees and discussions with local regulators.”
“Accreditation will come sooner or later. The industry should take its responsibility and play a key role in this process – although in close co-operation with local regulators,” Ligthart said. “ACI – The Financial Markets Association has the tools to play this key role on a global basis, and is willing to do so to the benefit of our markets and members and act as a safeguard for both.”