LONDON (Reuters) - Tougher rules may be needed to stop a repeat of the “outrageous” behaviour that has hit trust and confidence in financial markets in recent years, Bank of England Deputy Governor Minouche Shafik said on Monday.
Launching a consultation into commodity, bond and currency wholesale markets after banks were fined $6 billion (3.71 billion pounds) for rigging the benchmark interest rates, Shafik said that more changes may be needed to stop the “anything goes” attitude of traders uncovered in recent enforcement cases.
For many years the three markets were largely left to their own devices, run on a caveat emptor, or buyer beware, basis because the main participants were big banks that could look after themselves.
But fines for rigging the Libor benchmark, investigations into alleged similar behaviour in foreign exchange and concerns over parts of the bond market prompted the British government to call for a broad review of whether wholesale markets are fair and effective.
Attempted rigging of Libor at banks showed that it was not just a case of a few bad apples, Shafik said.
“Instead it seems that there were deep-rooted problems in the nature of FICC (fixed income, currency and commodities)markets that resulted in practices that would be unacceptable elsewhere,” she added. “... As somebody who believes in markets, I find this behaviour outrageous.”
The public consultation, open until January, asks what more, if anything, needs to be done on top of new British, European Union and global rules being brought in to stop market rigging and increase trading transparency.
“Caveat emptor has never meant ‘anything goes’ and certainly does not trump the obligation on a firm to act honestly, fairly and professionally,” she said in a speech at the London School of Economics.
These wholesale financial markets had a direct effect on people’s lives through products such as home loans and the cost of shopping or changing money for holidays, Shafik said.
As the memory of enforcement cases like Libor fades, the risk is that bad practice may re-emerge.
“Some say that may already be happening,” Shafik said.
The 67-page consultation paper makes no specific policy recommendations but lists a series of questions under two broad headings: market structure and conduct.
There are concerns that parts of the bond market are so thinly traded that they could be abused. Trading in some instruments is also dominated by only a few big banks, opening the door to potential collusion.
New European Union rules taking effect over the next two to three years will bring the markets more tightly under the regulatory net, but more clarity on the difference between good and bad behaviour may be needed, the paper says.
Existing powers, such as imposing more capital requirements for conduct failings could be used and delays on bonuses - as seen in the banking sector - could be applied to asset managers, interdealer brokers and trading firms to make it easier to stop payouts for employees who break the rules, the paper says.
The review is being conducted jointly by the Bank of England, the Financial Conduct Authority and the Treasury, with its recommendations due to be made next June.
Changes could include turning industry best practice codes into mandatory rules, requiring more electronic trading, increasing competition in markets and bringing the trading in certain FICC markets more fully into the scope of regulation.
Editing by David Goodman