How We Do It: Market Practices
The Market Practices Committee examines market practices across asset classes. The Committee has recently examined the practice of pre-hedging as well as publishing a series of Spotlight Reviews on how to improve transparency and efficiency across the precious metals markets.
“I am delighted to actively contribute to the work of FMSB. It is a unique organisation representing the wider wholesale market community. The Market Practices Committee‘s work across asset classes allows us to bring together expertise that would not normally be in the room together to talk openly and identify and improve in areas where its right that the industry should lead.”
Kieran Higgins Chair, FMSB Market Practices Committee and Head of Global Finance and Rates SM, Citi
Work in Progress
Pre-hedging disclosure and consent
Pre-hedging is where liquidity providers aim to hedge inventory risk in an anticipatory manner. With the release of IOSCO’s Pre-Hedging Final Report, the Working Group are developing industry guidance on disclosure and consent (building on B2 and B3 of the IOSCO recommendations). The output will be an updated version of FMSB’s Large Trades Standard) consolidating the guidance in a single source and focusing on where the market impact and conduct considerations associated with pre-hedging are likely to be greatest.
Market quotation mechanisms
Certain derivative contracts rely on third-party dealers to exercise expert judgement and provide a valuation at a specific point in time, typically as a fallback where market data or bilateral agreement is unavailable. These market quotation mechanisms are widely used across asset classes and contexts, including close-outs, termination events, disrupted reference prices and collateral valuation.
In practice, dealers are often reluctant to respond, given the absence of financial incentives and concerns around conduct, litigation and benchmark-related risk. This limits the reliability of market quotations as a valuation tool. FMSB is exploring whether behavioural guidance could support more consistent practice.
New issuance swaps
In 2018, FMSB issued a Standard considering the conduct risks associated with risk management transactions for new issuances. Market practices around the pricing of new issuance swaps and associated anticipatory risk management approaches have evolved since 2018, potentially presenting novel conduct questions.
