Concluding a year-long review, UK regulators issued the final report of the Fair and Effective Markets Review Committee last week, making a number of recommendations intended to restore confidence in the trading markets for fixed income, currency and commodities (“FICC”) in the wake of past misconduct.

The report noted the substantial fines that have been levied in recent years in connection with the attempted manipulation of LIBOR, foreign currency and other trading benchmarks and market prices, misrepresentations to investors and collusion.  Indeed, since 2012 authorities in multiple jurisdictions have imposed criminal and regulatory penalties aggregating more than $10 billion related to this conduct.  In June 2014, the Chancellor of the Exchequer, together with the Governor of the Bank of England, launched the Review to recommend changes in regulatory policies in the relevant markets.

The report describes a number of wide-ranging policy recommendations.  To improve conduct in the near term, the Review recommended, in part:

  • Developing globally endorsed common standards for trading practices in FICC markets;
  • Creating a new FICC Market Standards Board with participation by a broad cross-section of global and domestic UK firms to engage in regular dialogue with regulators;
  • Strengthening regulation in the UK with additional civil and criminal penalties; and
  • Spearheading international action to raise standards in global markets, including a single global code regarding foreign currency trading.

Over the longer term, the report recommended the improvement of market structure and transparency, the timely identification of potential anticompetitive structures and conduct risks, and enhanced surveillance of trading patterns and behaviors.

The report described what it characterized as “poor benchmark design,” in which certain trading benchmarks such as LIBOR were increasingly based on “judgment” of financial institutions rather than on actual transaction data.  As a result, these benchmarks were “more vulnerable” to attempted manipulation where financial institutions involved in setting the benchmarks had trading positions that would be affected by the benchmarks.

The report outlined the steps that already have been taken in the wake of enforcement activity in this area to improve the benchmark-setting process, including relying on more transaction-based data where possible, broadening the range of transactions on which benchmarks are based, expanding the number of institutions involved in setting the benchmarks and introducing more transparent pricing methodologies such as auctions.  In addition, the report identified “remaining gaps” where further improvements to the benchmarks were suggested.

With respect to foreign currency, the report recommended a single, global FX code that would provide a comprehensive set of principles to govern currency trading.  The code would cover practices relating to market integrity, information handling, treatment of counterparties, standards for trading venues, guidelines for behavior and stronger tools for promoting adherence to the code by market participants.

With regard to existing UK penalties for market-related crimes, the report recommended that UK criminal sanctions be extended to a wider range of instruments trading in FICC markets, and that the maximum prison sentence for such crimes be increased from 7 to 10 years.

The regulators will provide a further report to the Chancellor of the Exchequer by the end of June 2016 with regard to the implementation of these recommendations.


Special thanks to Proskauer summer associate Samantha Kobbe for her contributions to this post.