Regulators’ focus on conduct and controls in
the years that followed the crisis has completely reshaped the
day-to-day workings of financial institutions, according to
speakers at an industry event in London today.
Panellists at the Association for Financial Markets in
Europe’s European Market Liquidity conference
reflected on the effectiveness of actions taken by the
regulators in recent years.
"More rules don’t do anything to rebuild trust.
They’re hard to write for complex, fast-moving
industries, and they encourage regulatory arbitrage and a
tick-box mentality," said Mark Yallop, chair of the FICC
Markets Standards Board (FMSB) and Prudential Regulation
Authority board member. "A much better approach is to challenge
the industry to show it can become trustworthy again."
That’s the aim of the FMSB, a market-led
initiative chaired by Yallop that sets behavioural standards
and guidelines for the financial services industry.
- Speakers at an industry event in London today
said that regulators’ focus on conduct and
controls has been helpful in rebuilding trust and improving
- Even the SMR, which not many welcomed when first
introduced, has been incredibly positive;
- Conduct rules are unlikely to impact liquidity in
the same way regulation does but do make traders less willing
to exercise their own discretion;
- Technology also helps boost conduct by making
trades more easily traceable, but regulation and surveillance
does struggle to keep up with innovation.
Panellists also praised the UK’s senior
managers’ regime that became effective last March.
It introduces personal liability for senior managers at banks
and building societies.
"I confess, I rolled my eyes when I first saw the email
inviting me to training, thinking: 'there’s an
hour of my life I won’t get back’.
But the overall impact has not been nearly as negative as the
sceptics said," said BNY Mellon’s head of fixed
income electronic markets Dom Holland. "I realise it was the
right time to pull the leash and remind everyone why we need to
focus on this."
The FMSB is looking at internal surveillance and the tools
available to support that, as well as escalation – who
should do it and when, and how to make it something that comes
naturally to those in the market, explained Sally Dewar,
international head of regulatory affairs at JP Morgan.
"We have to be realistic. We
can’t catch every bad apple"
The electrification of markets has been helpful in boosting
conduct by providing more transparency than ever before. It
enables the lifecycle of a product to be far more easily
"We have to be realistic. We can’t catch every
bad apple, people will always be tempted to do things and they
do need to be found and punished," said Yallop. "But through
better use of technology, things are changing in extraordinary
There can be unintended consequences of electrification,
though. "There will be a bifurcation of the things that
can’t move towards technology, that will become
less loved and less liquid," said Holland. Concentration in a
smaller market sector also drives innovation, as seen with the
development of algorithms in high frequency trading.
"It’s very hard to keep surveillance ahead of
innovation because innovation will always be pushing the
boundaries," he added.
As for the conduct agenda’s impact on
liquidity, speakers believe this is minimal. As highlighted in
the Bank for International Settlements’ report on
the sterling crash, an over-reluctance among traders to
exercise their own discretion could have a small impact.
"Clients actually say they appreciate that the focus on
conduct and controls has demystified the way these markets
operate, which helps build trust and is actually positive for
liquidity," said Nat Tyce, co-head of macro trading at
But regulation, in particular capital requirements and the
leverage ratio, have obviously had a more significant, material
effect on liquidity.
"Liquidity has always been transient and actually perhaps
cheaper capital in the past has create a false idea of what
liquidity really was. The model is really evolving," added
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