HM Treasury, the Bank of England and the Financial Conduct Authority issued in 2014 a consultation document as part of their Fair and Effective Markets Review (FEMR). The purpose of consultation was to seek views on the fairness and effectiveness of the fixed income, currencies and commodities (FICC) markets, and on how to improve that fairness and effectiveness.
The FICC markets play a crucial role in almost every major financial transaction in the world, not least in the UK where a significant portion of these markets is based. More specifically, the consultation aims to identify areas of potential deficiency in these markets, evaluate the extent to which current reforms will address these deficiencies and propose ways to fill any gaps.
ACT Policy & Technical have had several discussions with staff of the Review and attended meetings with two of the three Review Chairs. FEMR attended a discussion with treasurers in the ACT’s offices and several treasurers, with P&T, attended a round-table at the Bank of England.
The ACT’s written response is in the download below. The principal points made are:
- Non-financial (commercial and industrial) companies and other nonfinancial sectors (e.g. universities and colleges, charities, regional/local governments, police authorities, hospital trusts, etc.) do want to use available, honest, open, reliable and fair markets. They use them for all the purposes considered in the Consultation Document and additionally, in the case of commodities, for commodity acquisition for use. But, overwhelmingly, not for speculation.
- Fairness and effectiveness require the idea of proportionality. Non-financial market users are a small part of most FICC markets. Regulation of and oversight processes for financial services applied to non-financial services organisations is often disproportionate, costly, and discouraging of real economy activity.
- Non-financial clients are unlikely materially to contribute to “market discipline”. Abuse by a bank in one area of FICC is unlikely to prompt a non-financial to change materially its attitude to the institution. The activity directly affected is likely to be only a part of an often very broad relationship. The disruption and cost of re-directing business, particularly if it involves operating rather than treasury units of the firm, is high.
- Standardisation of corporate bond issuance raises many questions and is not suitable for a wide-ranging consultation. If interesting, it should be the subject of a particular consultation with a long consultation period.
