London, 22 July 2016. The FICC Markets Standards Board (“FMSB”) has today published its second standard aimed at improving conduct in the wholesale Fixed Income, Currency and Commodities (“FICC”) markets. The standard, which is being issued in draft form for comment, covers binary options in the commodities markets.
Binary options, also known as barrier or digital options, pay out a fixed amount, or nothing, depending on whether the underlying price of a commodity hits a pre-agreed level at a specific point in time. This creates an inherent conflict between the bank or dealer selling the option and the client.
Elizabeth Corley, Interim Chair of the FMSB, said:
“This has been a priority area for the FMSB because of the recent well-publicised misconduct that binary options have given rise to. The new standard outlines the rationale for use of binary options and also makes clear the guidelines that market participants should follow to ensure they manage the conflict of interest in an appropriate fashion.”
The new standard has been drawn up after extensive consultation among FMSB members and regulatory authorities. It is being issued in the form of a transparency draft to provide an opportunity for public comment ahead of final ratification and issuance. The binary options standard is the second to be published by the FMSB, which was set up a year ago by market practitioners following the Fair and Effective Markets Review (“FEMR”) to improve conduct in the wholesale FICC markets. It does this by defining standards of good practice in contentious or grey areas of the markets.
Last month, the FMSB published a standard on reference price transactions in the fixed income rates markets. These transactions involve agreeing all aspects of a transaction except price which is set later based on a pre-agreed reference price and market. The standard set out guidance for practitioners about what is acceptable conduct in the context of these types of transaction and create greater clarity about what good market practice looks like, and what types of practice should be avoided.
The FMSB has 36 members reflecting the diversity of participants in the wholesale FICC markets. They include international users of the markets such as corporates, asset owners and asset managers, market infrastructure providers such as exchanges, custodians, and investment banks.
The FMSB is seeking comment from interested parties on the binary options standard over the summer. Submissions should be sent to firstname.lastname@example.org by midday (12:00pm BST), Friday 14th October, 2016. A final version of the standard will be published by the FMSB after evaluating public comments.
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Notes to Editors:
- The Fixed Income, Currency and Commodities or FICC Markets Standards Board (“FMSB”) is an independent body set up by market practitioners in 2015 to improve standards of conduct in wholesale FICC markets. It aims to bring transparency to grey areas in the wholesale FICC markets by documenting existing practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective is at the heart of the FMSB’s mission.
- Setting up the FMSB was one of the main recommendations to emerge from the Fair and Effective Markets Review (“FEMR”), which was conducted by HM Treasury, the Bank of England and the Financial Conduct Authority and reported in June 2015. The FEMR was launched in June 2014 to reinforce confidence in wholesale Fixed Income, Currency and Commodities markets in the wake of the serious misconduct seen in recent years.
- Elizabeth Corley CBE, Vice Chair, Allianz Global Investors, has been Interim Chair of the FMSB since July 2015. She will be succeeded as Chair in July 2016 by Mark Yallop but will remain on the Standards Board. Corley was previously Chief Executive of Allianz Global Investors and before that worked at Merrill Lynch Investment Managers and Coopers & Lybrand. She is a non-executive director of Pearson and BAe Systems, on the board of the Financial Reporting Council and an Advisory Council member of TheCityUK.
- Mark Yallop, who takes over as Chair of the FMSB in July 2016, has been an External Member of the Board of the Prudential Regulation Authority since December 2014, following a long career in wholesale financial markets. HHHe was UK Chief Executive Officer for UBS, overseeing investment banking, wealth and asset management. Before that he spent six years as Chief Operating Officer of ICAP plc and held senior positions at Deutsche Bank, including Chief Operating Officer for Deutsche Bank Group. He has served on the board of the International Swaps and Derivatives Association and is currently on the Board of the Centre for Social Justice and of the Create the Change Development Board for the Francis Crick Institute.
- The FMSB has a high-level Standards Board drawn from senior executives from across wholesale markets, from corporate clients, other market users such as asset managers and asset owners, and infrastructure providers such as exchanges and custodians. Reporting to the Standards Board are three standing sub-committees addressing Market Practices, Codes & Standards Convergence and Conduct & Ethics. The Market Practices sub-committees are split into 4 asset-class specific committees. There is also an Advisory Council representing the interests of member firms. A full list of individuals can be found in 7) and 8) below.
- The FMSB’s 36 members and 5 standing guests bring together sellside investment banks, buyside asset managers, exchanges, custodians and users of the market such as corporates. They are:
Aberdeen Asset Management; Allianz Global Investors; Bank of America Merrill Lynch; Bank of New York Mellon; Barclays; BlackRock; Bloomberg; BNP Paribas; Citi; CQS; Crédit Agricole CIB; Credit Suisse; Deutsche Bank; Deutsche Börse Group; Goldman Sachs; HSBC; ICAP; J.P. Morgan; Legal & General Investment Management; Linklaters (Legal Advisor); Lloyds Banking Group; London Stock Exchange Group; M&G Investments; Morgan Stanley; Nomura; PGGM; RBS; Royal Dutch Shell; Scotiabank; Société Générale; Standard Chartered; Standard Life Investments; State Street; Thomson Reuters; Tradeweb; UBS.
Association of Corporate Treasurers; Banking Standards Board; Hedge Fund Standards Board; KPMG; Oliver Wyman.
A full list of Advisory Council representatives and Standards Board members, can be found here: 16-07 FMSB Member List