Examining Impact of New Standard-of-Conduct Rules in FICC Markets

Fixed-income, currency and commodities markets are feeling the effects of a new focus by regulators on tightening standards of conduct and ensuring that dealers act in the best interests of all their clients.  A new report, Conduct Risk – Connecting the Dots, by Greenwich Associates examines these effects and pinpoints steps dealers are taking to mitigate and manage “Conduct Risk.”

FICC markets have traditionally operated under the implicit assumption that all participants were professionals and dealers had little duty of care toward their clients. Recently, a number of regulators, most notably the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA) in the U.K and the New York Fed are focusing on issues related to conduct. In the U.K., the Bank of England and FCA recently published the results of the Fair and Effective Markets Review (FEMR), which instituted the FICC Markets Standards Board (FMSB) to raise standards and promote best practices in wholesale FICC markets.

These actions have captured the full attention of senior management at sell-side firms, as regulators globally, and especially in the U.K., seek to hold senior management personally liable for the behavior of the staff in their organization.

Managing Conduct Risk
The new Greenwich Associates report lays out the basic components of a successful Conduct-Risk Program, including standard-setting and training, monitoring and the use of internal and external data to measure and benchmark conduct.

The FEMR advocates “maintaining a principles-based approach to regulation” and is deliberately seeking to avoid issuing highly prescriptive rules relating to conduct in order to maintain flexibility as markets evolve, minimizing the risk firms “game” the rules and ensuring that control processes do not become a “box-ticking exercise.”

“More broadly, it is neither practical nor desirable to have a compliance officer watching over the shoulder of every employee all the time,” says Greenwich Associates consultant Thomas Jacques. “Firms need to foster a strong culture, based on a set of clearly defined values and principles, ensuring that their workforce understands and embraces these values and integrates them into everything they do on behalf of their firm.”

Greenwich Associates believe responsibility for nurturing this culture lies with the firm’s Board, which has a duty to ensure it is transmitted throughout the organization. An effective way to ensure culture remains strong is to measure conduct based on objective feedback from clients as demonstrating good conduct will not only reduce regulatory risk, but will be an important differentiator when competing for client business.

“Sell-side firms are concluding that developing a reputation for the highest standards of conduct is a good way to win business,” Thomas Jacques concludes.