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ACI Financial Markets Association welcomes FEMR review…

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Marshall Bailey (pictured), president of ACI Financial Markets Association, comments on the release of the Fair and Effective Markets Review (FEMR)…

We welcome the recommendations set out in the Fair and Effective Markets Review (FEMR), which sets the foundation for positive change in the Fixed Income, Currency and Commodities (FICC) markets – particularly at a time when the issue of individual conduct and ethics in FICC markets is very much in the public eye.
From our perspective, the most important takeaway from this is that the FEMR will lead to an increased emphasis on financial education on ethics and industry-wide training as well as the adoption of a single code of conduct for Foreign Exchange to raise standards and accountability. Regulators are rightly stepping up efforts to tackle trader misbehaviour and place conduct at the heart of their reforms. The importance of this cannot be over-emphasised. The financial services industry employs millions of people globally, and the sector has been tarnished by the actions of a small minority acting in an unethical manner. Where they are guilty of misbehaviour, we need to make individuals accountable, but let’s also assist and support those seeking to improve the industry to do so.
Today’s report also makes clear that measuring and monitoring progress is central to behavioural change. It is clear that in some situations individuals receive little or no training or practical guidance, leading to uncertainty about what is and isn’t acceptable. Positive progress has already been made on the enforcement front, but to achieve sustainable change, we must go further and embed high standards of conduct and practices within organisations. This can be done through education, and by monitoring individual behaviour to ensure individuals at all levels – from the most junior ranks up to senior management at board level – acknowledge and abide by an enforceable code of conduct.
Initiatives like the ACI’s Code of Conduct and e-learning and certification (ELAC) Portal provide this critical service to organisations and individuals alike. The Model Code articulates in great detail how ethical conduct should be taught and monitored, and together with our ELAC portal, can help to reduce conduct risk, monitor behaviour and ensure any knowledge gaps are swiftly addressed by supervisors. This proactive approach to self-regulation is exactly the type of cultural shift regulators are seeking to achieve with these reforms. We are working closely with the many entities focused on ethical conduct and codes, and believe that a common solution can be found and most easily adhered to.
In addition, ensuring the universal application of a code of conduct across borders will be vital to changing behaviour and ensuring all participants and institutions are clear on what is and isn’t acceptable behaviour. If necessary, it must be backed up by law and embedded within national financial regulations to guarantee strong enforcement. I believe we need to look to bodies likes the Financial Stability Board, chaired by Bank of England Governor Mark Carney, or the Bank for International Settlements in Basel, which has already begun excellent work to harmonise international codes, to drive this further.
Levelling the playing field internationally in this way will provide much needed clarity and reduce opportunities for ethical arbitrage. It is also beneficial for regulators, as they can measure the behaviour, ethics and conduct of all participants by the same criteria – regardless of geographical location – and any misdemeanours can be immediately identified and addressed.

The reality is that customer preferences vary – and ‘last look’ can, at times, be an acceptable and effective form of execution. For example, some might prefer as tight a price as possible, accepting a potentially higher rejection rate through ‘last look,’ whilst others might prefer certainty of execution at a different price.
However, participants should take steps to ensure that provision of ‘last look’ liquidity does not create a false impression of market levels or depth. Under no circumstances should orders with ‘last look’ be placed for the purpose of price discovery and with no intention to trade, and use of electronic algorithms solely to accept trades that are favourable, and reject non-favourable deals when the criteria for assessing are equal, should be avoided completely.
The onus is on dealers employing ‘last look’ to be fully transparent and ensure customers are made aware that the practice is in use, the subsequent consequences are explained and that accurate records are kept on fill-and-reject ratios to demonstrate compliance. Having been fully apprised of the pros and cons of ‘last look’, customers should be in a position to decide to trade or not using “last look” pricing, in line with their own requirements and execution style.
The ACI’s Model Code provides clear guidance on how ’last look’ practices should be used by liquidity providers and the information that must be provided to customers in order to maintain a transparent and fair operation

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