The Board of the International Organization of Securities Commissions today published IOSCO Task Force Report on Wholesale Market Conduct, which describes the tools and approaches that IOSCO members use to discourage, identify, prevent and sanction misconduct by individuals in wholesale markets.
Wholesale markets are an important source of finance for companies and economic growth. Misconduct by individuals can undermine investor trust and confidence and the fair and efficient operation of these markets.
The report identifies the tools used by market regulators to minimize misconduct risk arising from the particular characteristics of wholesale markets, such as a decentralized market structure, opacity, conflicts of interest involving market makers, size and organizational complexity of market participants, and increasing automation.
Mr. Ashley Alder, Chair of the IOSCO Board and Chair of the Task Force on Market Conduct, said: “Misconduct erodes investor trust and confidence in financial services and undermines the effective operation of financial markets, including wholesale markets. The LIBOR and FX scandals highlight the severe consequences when firms or individuals fail to manage risk effectively or to observe proper standards of market conduct. This report provides tools to help IOSCO members minimize conduct risk in wholesale markets.”
Relevant tools to address this risk include tailored enforcement and remedial sanctions, such as orders to participate in market structural reforms or agreed remediation and other undertakings; surveillance and data analysis to identify suspicious trades; and the protection of whistleblowers. Also important in this area are tools designed to facilitate the sharing of information to track so-called bad apples — individuals with poor conduct records who move frequently from one company to another; ensure individual responsibility and accountability, such as liability or clear allocation and mapping of senior management´s responsibilities; and address increased automation, such as regulation of high frequency trading and direct electronic access or the establishment of legal certainty on computer-based forms of trading abuses.
The report also describes the regulatory requirements for market participants in wholesale markets, which are based upon broad expectations of their market conduct, such as honesty, integrity and competence. These expectations are consistent with existing IOSCO principles, standards and other initiatives on conduct regulation, including itsPrinciples for Financial Benchmarks, published in July 2013.
Finally, the report provides an overview of the ways in which market regulators help ensure that firms and individuals meet their obligations under the legal, regulatory and supervisory frameworks in their jurisdictions.