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The impact of the Fair and Effective Markets Review in 2016

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Interviewer: Andrew the findings into the investigation of the Forex and Libor issues prompted the fair and effective markets review, that was published in June of last year but what does that mean going forward with this year?Andrew Tuson: Well it’s very important that firms are very mindful about the recommendations of the fair and effective markets review or FEMR as its known. It’s very important that whilst a lot of those recommendations were quite soft and difficult to interpret there were some very important messages which came across in the review as to how the FCA will look to consider the way in which firms behave in relation to the fixed income currency and commodities markets and it’s very important in particular that firms show to the regulator that this so called culture of impunity which the regulators have noted had developed in the fixed income currency and commodity markets no longer exists and that firms are carrying out careful surveillance of what happens in those markets so that it’s not just the equities markets but also these fixed income currency and commodity markets which are at the forefront of the fight against financial crime and the way in which legal and compliance functions analyse and consider products which are traded in those markets.Interviewer: So how can firms mitigate the risks of market abuse?Andrew Tuson: Well in 2016 we are going to see some very important changes in relation to market abuse so in July we’ll the market abuse regulation come into effect and that regulation will extend the scope of the UK market abuse regime so it won’t just be products which are traded on exchanges like equities trading on exchanges, but also products which fall in the fixed income currency and commodity markets which are traded on other forms of platforms like multi-lateral trading facilities, MTF’s or organised trading facilities, OTF’s which will fall within the scope of that regime so it’s important that firms now take steps to identify what sorts of products are going to fall within the scope of the new market abuse regime and ensure that they have adequate surveillance in place so that they recognise any risks of suspicion in relation to those markets so that the regulators are aware of firms concerns over suspicions through suspicious activity reports being filed.Interviewer: Benchmark manipulation has been another issue hasn’t it; how can firms mitigate against that risk?Andrew Tuson: Well through the fair and effective markets review, in addition to Libor, 7 other benchmarks became regulated in 2015 and so that means that the way in which 8 benchmarks now within the UK are operating falls within the scope of the FCA’s. So in particular the way in which benchmarks such as the WMR4PM fix, some repo rate benchmarks SONIA and RONIA in addition to Libor are fixed to fall within the scope of requirements set out in the FCA’s handbook so whilst that covers in particular the way in which contributions are made to administrators and the way in which administrators gather in that data to set the benchmark price, also there is a criminal regime which applies very broadly now to anyone who conducts any form of activity which could impact the setting of those 8 benchmarks which are regulated within the UK.Interviewer: So this sounds like a much wider scope than it may first appear?Andrew Tuson: Well yes that’s right. I think that the criminal aspects are much broader than the civil regime currently although through the market abuse regulation it would be a civil offence of market abuse for any individuals to manipulate benchmark rates but it’s also very important that firms bear in mind a fanatic review which the FCA conducted in 2015 where the FCA identified that it’s looking at any form of index which are used in firms’ businesses and the FCA wants to make sure that firms look at the industries which are using their businesses which could be used to price financial instruments and financial products and that funds are aware of ways in which those industries might be manipulated and that firms should have in place systems and controls to prevent any form of manipulation in relation to other benchmarks not just Libor and FX and I think we often see that fanatic reviews can be a pre-cursor to enforcement action and so it’s very important that firms don’t just look at the 8 regulated benchmarks and think that that is the end of the story as far as the FCA is concerned but that firms have a much broader approach to the risk of a benchmark communication.Interviewer: Andrew thank you.

The Fair and Effective Markets Review, published last year, has far reaching effects going into 2016. With Market Abuse Regulation coming into force in July, Andrew Tuson considers how firms can mitigate their risk, the importance of thorough surveillance and the broader scope of benchmark regulation.

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