By Patrick Graham and Huw Jones
LONDON (Reuters) - To what extent can a $5 trillion (3 trillion pound) a day market be fair and transparent when a third of the trading is done by just two banks?
That's a question critics say went unasked and therefore unanswered in Britain's review of fixed income, currency and commodity (FICC) markets, aimed at learning from the interest and foreign exchange rate-rigging scandals that have cost banks billions of pounds in fines.
The Bank of England-run Fair and Effective Markets Review (FEMR), which published its final report on Wednesday, is largely focused on foreign exchange, a largely private over-the-counter market where industry estimates say at least $1.5 trillion a day is traded by the two biggest players, Citi (N:C) and Deutsche Bank (DE:DBKGn) .
This is roughly double the volume of business done on a handful of multi-user trading platforms, yet the issue of public venues for trading has yet to be tackled fully by regulators.
"We found in the consultation we did on FEMR that there really isn't an appetite for more official action to put more FICC markets onto exchanges and platforms," said Edwin Schooling-Latter, head of market infrastructure at the Financial Conduct Authority, the watchdog that co-chaired the review.
"One of the reasons for that, of course, is there are lots of market initiatives leading in that direction anyway. In FX, platform trading is steadily growing in market share. There are market participants wanting to allow those initiatives a chance to succeed rather than rushing for more official action."
The review put forward proposals for making senior managers more accountable in FICC markets and lengthening maximum jail sentences for market abuse offences and created a new FICC Market Standards Board.
But the industry is happy that the onerous accountability rules for banks won't be applied in full in FICC markets, and that the review shied away from shaking up market structures.
However, some in the industry see such a shake-up in trading as inevitable and the BoE will hold an Open Forum in the autumn when such issues will be discussed. It also said that more transparency on how client flows are dealt with by big players like Citi and Deutsche would help show the market was fair.
BoE Governor Mark Carney also heads the Financial Stability Board (FSB), a global regulatory body.
"The feeling is that the FSB wants the spot forex market moved to traded venues," said Alex McDonald, chief executive of London's Wholesale Market Brokers Association. "That is completely absent (from the review). I thought they would have explored this a bit more but they didn't."
Citi and Deutsche both declined to comment.
GLOBAL GAME
Carney hopes his role as head of the FSB will help persuade other countries to adopt the review's recommendations as well, essential to making them stick in such global markets.
This is why, industry experts say, the recommendations were relatively modest in part, to get multi-national backing. The review trod lightly, for example, on the issue of paying staff bonuses in FICC markets, saying any proposals should be at the global level.
"It's an interesting balancing act with the UK wanting to be seen as thought leaders without crippling international competitiveness in other areas like remuneration," said Stuart King, managing director of Promontory, a financial consultancy.
The review recommends that elements of Britain's Senior Managers' Regime (SMR) being applied to bankers from 2016 should be applied to senior staff in FICC markets too.
But one controversial element of SMR will be missing: the presumption of responsibility, where bankers will have to prove they were not aware of any misconduct uncovered on their watch.
There was a fear that shifting the burden of proof onto the defendant would risk London losing its central position in FICC markets.
"If you have teeth for something in an entirely global market then you can do it from somewhere else. This sort of stuff is not even European Union legislation," McDonald said.
King, however, said even SMR-lite will still be far more onerous than what FICC staff face now.
"It will be quite a shock in process terms to asset managers and brokers. They will have to say who is responsible for what and keep that up to date, reflect it in appraisals and staff training," he said.
"After what happened with the Libor and forex scandals, very senior people were not held to account but this will make it a lot easier for the regulator to go up the line."
The new industry-led Market Standards Board has also generated scepticism, anticipated perhaps by Carney who said if its conduct guidelines are ignored then hard rules would be introduced.
Britain ended up scrapping s
By Patrick Graham and Huw Jones
LONDON (Reuters) - To what extent can a $5 trillion (3 trillion pound) a day market be fair and transparent when a third of the trading is done by just two banks?
That's a question critics say went unasked and therefore unanswered in Britain's review of fixed income, currency and commodity (FICC) markets, aimed at learning from the interest and foreign exchange rate-rigging scandals that have cost banks billions of pounds in fines.
The Bank of England-run Fair and Effective Markets Review (FEMR), which published its final report on Wednesday, is largely focused on foreign exchange, a largely private over-the-counter market where industry estimates say at least $1.5 trillion a day is traded by the two biggest players, Citi (N:C) and Deutsche Bank (DE:DBKGn) .
This is roughly double the volume of business done on a handful of multi-user trading platforms, yet the issue of public venues for trading has yet to be tackled fully by regulators.
"We found in the consultation we did on FEMR that there really isn't an appetite for more official action to put more FICC markets onto exchanges and platforms," said Edwin Schooling-Latter, head of market infrastructure at the Financial Conduct Authority, the watchdog that co-chaired the review.
"One of the reasons for that, of course, is there are lots of market initiatives leading in that direction anyway. In FX, platform trading is steadily growing in market share. There are market participants wanting to allow those initiatives a chance to succeed rather than rushing for more official action."
The review put forward proposals for making senior managers more accountable in FICC markets and lengthening maximum jail sentences for market abuse offences and created a new FICC Market Standards Board.
But the industry is happy that the onerous accountability rules for banks won't be applied in full in FICC markets, and that the review shied away from shaking up market structures.
However, some in the industry see such a shake-up in trading as inevitable and the BoE will hold an Open Forum in the autumn when such issues will be discussed. It also said that more transparency on how client flows are dealt with by big players like Citi and Deutsche would help show the market was fair.
BoE Governor Mark Carney also heads the Financial Stability Board (FSB), a global regulatory body.
"The feeling is that the FSB wants the spot forex market moved to traded venues," said Alex McDonald, chief executive of London's Wholesale Market Brokers Association. "That is completely absent (from the review). I thought they would have explored this a bit more but they didn't."
Citi and Deutsche both declined to comment.
GLOBAL GAME
Carney hopes his role as head of the FSB will help persuade other countries to adopt the review's recommendations as well, essential to making them stick in such global markets.
This is why, industry experts say, the recommendations were relatively modest in part, to get multi-national backing. The review trod lightly, for example, on the issue of paying staff bonuses in FICC markets, saying any proposals should be at the global level.
"It's an interesting balancing act with the UK wanting to be seen as thought leaders without crippling international competitiveness in other areas like remuneration," said Stuart King, managing director of Promontory, a financial consultancy.
The review recommends that elements of Britain's Senior Managers' Regime (SMR) being applied to bankers from 2016 should be applied to senior staff in FICC markets too.
But one controversial element of SMR will be missing: the presumption of responsibility, where bankers will have to prove they were not aware of any misconduct uncovered on their watch.
There was a fear that shifting the burden of proof onto the defendant would risk London losing its central position in FICC markets.
"If you have teeth for something in an entirely global market then you can do it from somewhere else. This sort of stuff is not even European Union legislation," McDonald said.
King, however, said even SMR-lite will still be far more onerous than what FICC staff face now.
"It will be quite a shock in process terms to asset managers and brokers. They will have to say who is responsible for what and keep that up to date, reflect it in appraisals and staff training," he said.
"After what happened with the Libor and forex scandals, very senior people were not held to account but this will make it a lot easier for the regulator to go up the line."
The new industry-led Market Standards Board has also generated scepticism, anticipated perhaps by Carney who said if its conduct guidelines are ignored then hard rules would be introduced.
Britain ended up scrapping similar, financial sector "self regulatory organisatons" or SROs in the past.
"The old SROs were seen to have had a mixed history. It's clear that if the new body cannot do better more regulation will be unavoidable," King said.