Written on: 6 May 2021

6 May 2021 – The FICC Markets Standards Board (“FMSB”) today publishes a final Standard setting out expected behaviours for the execution of Large Trades by participants in FICC markets.  

Large Trades – transactions that are greater than the available liquidity prevailing in the market – can create undue pressure on markets, across all FICC asset classes. They create real execution challenges, both for market users and for dealers, often leading to market impact and price volatility, and can sometimes give rise to conflicts of interest for those managing the resulting market exposures.   

What constitutes a large trade will vary across markets and over time. This Standard focuses on transactions substantially larger than the observed liquidity in the relevant product market around the time of execution, and which could be reasonably expected to have a material impact on prices in the market or related markets.  

This Standard is intended to:  

i. Reduce information asymmetries between dealers and clients in relation to the execution of Large Trades and enhance the understanding of clients as to the method of execution and potential impact of Large Trades on the market and price the client receives; 

ii. Clarify and codify the principles governing the pre-hedging of Large Trades, building on the FX Global Code (‘FXGC’) and extending principles compatible with the FXGC to the fixed income and commodities markets; iii. Establish clear expectations with regard to client confidentiality given the potentially heightened impacts of information leakage in the context of Large Trades; and

iv. Ensure that clients communicate with dealers in a transparent manner so as to not have a detrimental impact on the effectiveness of the execution of a Large Trade by a dealer. 

The Standard contains 10 core principles, which include:  

  • Dealers should communicate to clients that the trade may be large in the relevant market. 
  • Clients should communicate in a transparent manner that is clear, accurate and not misleading.  
  • Dealers should not disclose the details of large trades to other market participants unless necessary to give effect to the clients’ instructions  
  • Consideration of the circumstances in which pre-hedging may be undertaken and the expected behaviours of market participants when pre-hedging large trades. 

The application of these core principles differs depending on whether a market participant is acting as an agent or a principal.  

In respect of pre-hedging, the Standard sets out that when a dealer is acting as an agent, pre-hedging is never permitted in the relevant market. 

For principal transactions, the Standard sets out that pre-hedging should only be undertaken where: 

  1. the dealer legitimately expects to take on market risk and the pre-hedging is undertaken at the dealer’s own risk; 
  2. the trading activity is reasonable relative to the size and nature of the anticipated transaction;  
  3. it aims to minimise the impact of the activity on the market; and  
  4. it is designed to benefit the client and not executed in a manner that is meant to disadvantage the client. 

This Standard applies to all participants in the wholesale FICC markets in Europe, subject to any applicable local regulatory restrictions, but market participants may elect to apply this Standard in other jurisdictions. 

The Standard was issued as a Transparency Draft for comments from the market in December 2020. Responding to feedback, a small number of changes and additions were made.   

Mark Yallop, Chair of FMSB said: Ensuring fair and transparent execution of out-sized orders has been a significant challenge for dealers for my entire career in FICC markets, and I daresay well before then too.  It is an extremely important topic, of current interest to many market participants, in all jurisdictions globally.   Ensuring that markets can deliver fair and effective outcomes for Large Trades is a challenge for both dealers and their clients: both sides of the transaction have important responsibilities. FMSB’s mandate to represent the interests of all market participants make it the natural venue to tackle this long-standing challenge and it is particularly pleasing to have been able to collaborate with the FXGC. It is also very gratifying that this work has been led for FMSB by one of our long-standing corporate, end-user Members. I thank them and all our Members who have supported the drafting of this new Standard.”  

Michael Dawson, Head of Liquidity and FX at Shell and Chair of the FMSB Large Trades Working Group said: By their nature large trades can have a significant impact othe market, as well as there being the potential for heightened conduct risks associated with their execution. This Standard therefore seeks to establish principles for how market participants should behave in relation to the execution of such trades. The core principles set out in this Standard are relevant across asset classes and we believe this should be of value to all market participants involved in transacting large trades.” 

James Kemp, Managing Director at Global Financial Markets Associations said: “It is extremely constructive to see the close collaboration between market participants in producing this guidance for Large Trades and that key relevant elements of this guidance dovetail closely with the Global FX Committee’s evolving guidance on Pre-Hedging.  Creating a clear and consistent industry position on these topics is helpful in providing all market participants with well understood guidance that serves to underpin effective market functioning.” 

Media contacts 

Andy Donald or Freddie Barber 
+44 207 379 5151 

Notes to Editors 

1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.  

FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets. 

FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets. 

FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants. 

All FMSB publications are available on the FMSB website at fmsb.com/our-publications/

2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.  

FEMR set FMSB four strategic goals: 

  1. Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks. 
  2. Developing best market practice through the production of standards and other materials that create a common understanding. 
  3. Driving global adherence through ensuring standards are comprehensible and practical. 
  4. Developing consistent approaches to market practices through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies. 

3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities. 

4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique.  

The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/ 

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