The features of the global financial crisis – failing financial titans, government bailouts and only lacklustre levels of growth in the years since – remain hard to fathom.
In the aftermath of the crisis, governments, central banks and regulators began to assess the damage and to look for its sources. In the UK, conduct within fixed income currencies and commodities (FICC) markets fell under the spotlight.
In 2015, the Bank of England, HM Treasury and Financial Conduct Authority’s Fair and Effective Markets Review found that the informal codes of conduct that wholesale FICC markets were notionally bound by had been routinely misunderstood or disregarded.
Efforts to establish higher standards of conduct in financial markets and restore faith have been in the foreground ever since.
Notable among these efforts, and supported by The Association of Corporate Treasurers (ACT), are the FX Global Code, first published in May 2017, and the UK Money Markets Code, applicable to corporates engaged in unsecured deposit and repo markets and due for review this year.
In fixed income currencies and commodities markets, there are still practices that are opaque and perhaps not fully understood
Since 2016, the FICC Markets Standards Board (FMSB) has engaged fully with the business of delineating standards and good practice, delivering a suite of published standards and statements of good practice covering subjects including conduct training, monitoring electronic communications and suspicious transaction reporting.
It also published its seminal Behavioural Cluster Analysis, which identifies archetypal patterns of misconduct in financial markets.
The FMSB’s standards and statements of good practice represent painstaking work – the bringing together of parties and counterparties to identify core principles that will improve transparency, fairness and effectiveness in wholesale FICC markets.
As Martin Pluves, the FMSB’s new CEO, puts it: “The aim is to make practices that are undertaken in those markets predictable. It may sound boring, but actually this is a laudable goal – to see to it that participants to trading activity, if they are trading with and between FMSB members, know what’s happening behind the scenes.
“Opaque activities are made more transparent, so different actors in the market understand what will and will not be going on in that trading activity.”
One of the FMSB’s current activities is exploring the field of large trades – specifically the rights and obligations of participants to trades that are significantly larger than typical liquidity levels in the relevant product market.
In particular, the organisation examines where those trades have the potential to impact market pricing, and would therefore require additional ‘handling’ in order to mitigate risks and protect the interests of those taking part.
Michael Dawson, head of liquidity and FX at Shell International, chairs the FMSB working group focused on developing the Standard for the Execution of Large Trades in FICC Markets – an area of particular significance to corporate treasurers.
Involvement in the standard-setting exercise is important, he believes, not just for Shell, but for the wider corporate treasury world and for financial markets.
The conversations that take place within the working groups have the broad aim of reinforcing good conduct and eradicating ambiguities that might otherwise arise when buy- and sell-sides come together in the discussions that precede transactions.
“We [corporate treasurers] provide a perspective on the issues that matter to the buy-side,” says Dawson. “The FMSB’s work is relevant because by holding these discussions and working towards common codes of conduct we can help to drive good standards in markets.”
As more standards are developed and as more corporates, banks and investors refer to them and use them as model ways to engage with each other, greater consensus and commonality will be achieved.
“My expectation is that banks will not just conduct themselves according to these standards in their relationship with Shell, but with all their corporate clients. That’s how we establish fair and effective markets – through driving better standards for all,” Dawson continues.
As Pluves says: “What we would seek to do as a standards setter is to set out good practices that apply to the relationship between corporate treasurers, banks and investors, to protect all participants without inhibiting access to open, fair and liquid markets.
“These matters are typically more complex than you might think once you get into the detailed mechanics of trading and information asymmetry in capital markets.”
The FMSB’s working groups bring together a full range of participants to look at areas where that unhelpful ambiguity exists, so that they can clarify common understanding and define practice.
“It’s not about wilful misconduct,” says Pluves. “The most extreme cases of fraud and manipulation of markets are of course a matter for the law courts. But aside from clear abusive activities, there remains a significant regulatory void.
“When is it appropriate and expected that a bank will pre-hedge a client trade? When does that cross the line and become a case of market manipulation? We seek to answer very important and difficult questions, to identify potential areas of business practice risk and help members to mitigate these with clear and practical guidance.”
As CEO, Pluves’ objective is to ensure that the FMSB can continue to deliver benefits in a rapidly changing context.
“We see an ever-faster pace of change and growth of the role of technology. For example, the expanding use of algorithmic trading and increased reliance on machine learning – predominantly in surveillance rather than the execution of trades, but that use is expected to increase in the near term.”
These developments can alter parameters very quickly. “If new practices evolve without full scrutiny on what’s really going on, there is room for misinterpretation of what constitutes fair and effective behaviour. Before they know where they are, participants can find themselves on the wrong side of a line that they weren’t fully aware existed.”
Away from the bleeding edge of technological innovation, what the financial crisis showed was that traditional markets – left unexamined – can be open to abuse. The FMSB has found that even in some of the oldest markets, there remain significant areas for clarification.
“In fixed income currencies and commodities markets, some of the oldest means and mechanisms of raising capital or transferring risk, there are still practices that are opaque and perhaps not fully understood,” Pluves says.
The FMSB’s most recent work looks at primary issuance of corporate and government bonds investigating the primary auction process into the secondary trading market, to ensure that information flows are understood and that practices undertaken by all participants are clear and consistent.
And specifically for corporate treasurers, work around capital raising, bond issuance and in FX markets is the mainstay of the FMSB.
“Those markets where corporate treasury is most engaged are the areas where we’re focused as an organisation,” says Pluves.
He notes: “We run a very open approach to maximise engagement and support from across the markets. We have industry association support for FMSB activities, we have members on the standards board and on our advisory council from the ACT, and also other bodies, looking at FX markets and beyond.”
Avoiding surprises means all parties can be confident about reliable, predictable ways of engaging and dealing.
“Any surprises in these processes are generally bad news,” adds Pluves. “When participants realise something is happening in a way that they had assumed it wouldn’t, that creates financial, reputational and regulatory risk for everybody involved, and damages the fairness and effectiveness of financial markets.
“Our aim is always to promote open, transparent, predictable and repeatable market practices where participants’ time and energy is focused on managing financial risks and opportunities.”
Visit the FMSB’s website here.
Liz Loxton is editor of The Treasurer
This article was taken from the April/May 2020 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership