FX Standards Body Makes Bid to Cure Market Colour Blindness

Trader talk under microscope again as firms face new pressure to cut out insider dealing.

What information traders can and can’t share with each other has been high on regulatory agendas since the practice of using online chatrooms to swap sensitive market and client data became public knowledge, following multiple rigging scandals.

The British body set up in the wake of those scandals to help clean up the market, the FICC Markets Standards Board, proposed new guidance in June on what so-called “market colour” can be disclosed by participants in foreign exchange, commodities and fixed income markets.

“The question of what information may be shared between participants in these markets is complex and recent conduct events have drawn attention to the risks associated with sharing information in an inappropriate manner,” the board said in a statement.

Banks were fined billions of dollars for attempting to fix currency markets and benchmark rates such as the London Interbank Offered Rate (Libor), and even in 2018 penalties are still rolling in for transgressions by traders blithely exchanging confidential client information in emails, instant messaging and phone calls.

It has published a “statement of good practice” for public consultation, closing in September, which outlines how traders should clearly identify and also appropriately limit access to confidential market information, and it gives examples of what can and cannot be included in such “market colour”.

“The document states that market colour relating to high-level, non-specific market activity can be freely shared when provided in general terms, sufficiently aggregated and anonymised, such that client confidential information cannot be ‘reverse engineered’ from it,” said Catherine Blake of Norton Rose Fulbright law firm.

There are nine good practice statements for financial services firms to consider when mulling their own conduct in certain markets.

These include guidance on not disclosing confidential information within their firms except to those persons who have a valid reason for receiving such information, and on issues pertaining to the sharing of confidential information with parties outside of the firm.

Experts say the paper is a solid attempt to engage with contentious issues, and tallies with the direction of regulatory travel in issues such as conduct, forcing firms to beef up surveillance and monitoring of traders and employing new data-crunching techniques to better analyse communications.

“We have had this kind of heightened environment for some time in relation to market abuse and insider trading, where you have to be careful, and firms have to train individuals on what they can and can’t do, because it’s not obvious,” said Michael Wainwright, financial services partner at Dentons law firm in London.

He pointed to the prosecutions coming out of Libor and similar incidents where almost all of those accused said they simply thought they were doing their jobs and didn’t believe there was anything wrong with their actions.

Rival firms working together on deals and in partnerships must also be careful, said Wainwright.

“It certainly fits with some challenges that we are hearing in the market around collaborations where there are also competing interests, as firms have to be careful what they say to each other while trying to run a business together,” he said.

The move is part of a gradual process of the regulators realising this is the only way you can regulate a financial marketplace that is changing all the time, Wainwright told Radar.

“The Securities and Investments Board tried to write a rulebook that told everyone exactly what they could and couldn’t do, but over the last 30 years we have realised that is not enough,” said Wainwright. “You can’t just live by rules; culture is so important.”

Given the FMSB is an industry body which counts all major global banks among its members, it is expected that all will look to follow the guidance.