From intellectual certainty to debate

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Speech by Martin Wheatley, Chief Executive of the FCA, delivered at the AFME's Annual European Market Liquidity Conference. This is the text of the speech as drafted, which may differ from the delivered version.

Ten years on, of course, and with the substantial advantage of ex-post insight, we’re today reflecting on a decade that has clearly been anything but settled, or tranquil, for financial leaders.

It’s a great pleasure to join everyone for AFME’s anniversary conference.

The theme for today – a decade of change – is an interesting one of course, in as much as ten years ago, few predicted anything of the kind.

In terms of rule-making, certainly, the clear consensus in 2005 – in business, as well as in politics and regulation – was that the financial sector was facing a period of settled tranquillity.

At the time many national governments, along with the European Commission, had already made large-scale commitments to significantly reduce regulatory intervention.

And, importantly, for global policy makers this process of rationalisation had come to be seen not just an economic imperative but a social one as well. Deregulation during the 1980s and 90s, its impact on capital allocation, was widely linked to both higher wages, as well as higher employment levels.

The broad assumption then was that more of the same would, and should follow. It was the high water mark, if you like, for market theory – Alan Greenspan was granted freedom of the City of London – and there were those who believed we were moving closer to an ideal of market ‘completeness’.

Ten years on, of course, and with the substantial advantage of ex-post insight, we’re today reflecting on a decade that has clearly been anything but settled, or tranquil, for financial leaders.

Prudential requirements have been profoundly reformed. Disclosure standards significantly strengthened. Global banks that were once levered 40 to 50 times, today appear far more resilient. And, in core policy areas that set the framework for secondary market trading, like MiFID II, draft technical standards have been published and are now open for consultation.

So, in a comparatively short space of time, risk appetites have travelled a significant distance. National governments still value the importance of efficiency. But not at any cost. There is not the same uncontested conviction in the ability of capital markets to transfer risk safely, nor to avoid excessive volatility.

What we have instead, replacing confidence and consensus, is an often difficult, uncertain debate in the wholesale space, centred on conduct and the complexity of translating political principles into professional practice.

The FCA wholesale approach

So, the question now being posed of leaders is: how do we objectively balance focus on financial imperatives, against broader priorities related to culture, market integrity and resilience? Priorities that sometimes – not always but sometimes – appear to compete with one another.

At the core of this debate, of course, is the City, which has both moral and legal obligations to advance the interests of clients and shareholders, as well as a wider responsibility for the social consequences of market misconduct.

Now, the impact of the former is generally easier to publicly contextualise than the latter. We can make objective assessments of profit, for example, in a way that we simply couldn’t assess the impact of Libor manipulation, say, on UK retail mortgages. But these are effectively two sides of the same coin.

Conduct infringements in the markets can, as we all know, ultimately deprive retail customers at the end of wholesale chains of enormous aggregate sums. Just as the same markets can – in their capacity as a transmission mechanism between economic policy and actual activity – underpin the most significant societal objectives of our day.

The basic conclusion here then, is that markets have enormous social significance and it makes sense for policy makers to reflect this as they set priorities.

So, one of the most important discussions we are having at the FCA at the moment, is the extent to which we should increasingly assess wholesale priorities not just against our market integrity objective – but against our consumer protection mandate as well.

And certainly, many of the key issues currently occupying the minds of regulators do incorporate both ends of this debate. Including areas like FX remediation work, the Fair and Effective Markets Review, MiFID II implementation, wholesale competition work and the like – where policy discussions over economic objectives are heavily contextualised by broader concerns over fairness, behaviour, integrity and so on.  

Fair and Effective Markets Review (FEMR)

So, this morning I wanted to offer a few broad reflections on each of these areas. And look at some of the key debates that we need to move forward, starting with the Fair and Effective Markets Review and our post-FX remediation work.

On the latter, we have – as most here will know – reached the end of the FEMR consultation period, which Andrew will be discussing in detail later – so just a couple of key observations from me.

First, although it’s likely that as we go through the review responses, the solution architecture will be narrowed: the main policy challenges (particularly around areas like market heterogeneity and extra-territoriality) are still there.    

So, important questions clearly remain, for example, over how you move things forward, in tandem, across what is a very, very wide range of markets: where energy looks very different from copper, which is different from silver, which is different again from fixed income and currencies and so on and so forth.

Equally, how do you set about a national review on what are, effectively, global markets? In the sense that the volume of trading will move between London, New York, Singapore, Hong Kong and the like, depending on asset class.

Any national policy commitment here has to account for the possibility that you invite the potential for regulatory arbitrage. Indeed, if the UK were to strike out on its own, you can imagine a pretty fast drift of traders in London saying actually, let’s run this book from X or Y market.

So, you cannot easily have a local solution here to what is, effectively, a global problem. But nor, actually, is the status quo a viable option in the current context: which brings me on to my second point.

We are, as former Vanguard CEO John Bogle said, a long way from the ‘go-go years of the late 60s, when hot managers were treated like Hollywood stars’. Public trust is, frankly, at such a level as to make industry inaction an impossibility.

It is, therefore, both a political and societal imperative to reach agreed conclusions here on the best way to move things forward.

Certainly, industry cannot sensibly keep stumbling from one asset class to another where it discovers things are not working as they should be. At some point, the message has to be carried across business units, so you don’t end up in a situation where the fire leaps from trading desk to trading desk.


Despite the difficulty of the context, industry engagement with policy makers on this post-FX work has, to date, been overwhelmingly positive.

And this brings me on to the foreign exchange markets, an asset class where we were effectively encountering quite similar issues to Libor – unmonitored chat-rooms, collusion and so on.

So, the first public challenge here was invariably: why do cases like this occur, and then seem to keep on occurring?

And frankly, there was no good answer here. The initial response, such as it was, centred on some of the players involved telling us that the process of hedging ahead of a 4 o'clock fix, say, or a 1:15 ECB fix, actually looks like manipulation but really it isn't, because it is simply hedging the position that those traders knew they we're going to have to deliver.

In other words, the fact that participants were moving the market in their direction and that they profited from it, was not a manipulation. It was simply a consequence of prudent hedging in the market. The argument being that this was a grey area.

So, effectively the challenge put back to policy makers was this: where does trading ahead of a client order turn from risk management, to front running? Give us precise rules here to manage these moral dilemmas.

And, in one sense, this is perfectly understandable and practical from a compliance perspective. Bright lines are easier for lawyers to work from.

But there are two important challenges here. First, these ‘conduct grey areas’, if that’s what we want to call them, often seem more black and white than some are prepared to admit.

Second, and most problematic from my perspective, when lawyers appeal for rules to cover all possible scenarios, it suggests they’re more interested in debating whether something is do-able, than they are interested in whether it is principled – which is the conversation the sector really needs to be holding.

Now, regulators are, of course, part of this conversation. But they cannot sensibly attempt to codify the limits of what is, or is not, morally acceptable.

So, much of the FCA’s post-FX remediation work here has focussed on individual, and corporate accountability – and will include staff in ‘significant influence functions’ attesting, with signature on the dotted line, to the fact they’ve taken reasonable steps to make sure their firm’s systems and controls effectively manage conduct risk. 

This, in turn, immediately introduces a sharper sense of personal accountability into the equation. The threat to leaders becomes more obviously ‘existential’, if you like, than under the threat of a corporate fine – with those who do attest at the front of the queue should issues arise. 

As a policy option, however, it does not correspond to a ‘heads on blocks’ strategy for every conceivable issue that might affect an FX trading desk – perfection is simply not feasible, nor possible.

And, one final point here. It is worth observing that, despite the difficulty of the context, industry engagement with policy makers on this post-FX work has, to date, been overwhelmingly positive.

Which, in turn, puts us in a position where there’s a more realistic opportunity of achieving agreed conclusions (or at least agreed compromises) on how to move things forward.

It has also, actually, provided us with a useful blueprint for future engagement between regulators and industry – particularly in areas where that transition between political principle, to professional practice, is a particularly complex one – as it very clearly is in MiFID II. The third policy area I want to look at today.


The most pressing issue here perhaps is that familiar discussion around transparency versus liquidity, which is dominated by specific challenges of balance.

So, internalisation, as an example, is clearly useful for making moves without affecting price – but how does this relate to the desire for transparency? Equally, what do we feel about venues being rewarded for volume rather than liquidity?

Certainly, the political impetus here is behind transparency. A crude measure maybe – but the original G20 communique from Pittsburgh included some 21 references to transparency. Just two on liquidity.

And this, effectively, is the subtext to MiFID II landing in favour of more lit, on-venue, transparent trading. Leaders want to improve information, as well as price discovery and the sourcing of liquidity.

And this is going to happen, as we know, in large part by extending transparency into bond trading and derivative trading, at both the pre-and post-trade stages of a transaction.

There will also be provision for specified derivative contracts that had previously been privately negotiated (with almost no market visibility) to be mandated to trade on exchanges or similar venues, including the new Organised Trading Facilities.

The equity transparency regime will, in turn, be extended from shares, to other equity-like instruments, like certificates, GDRs, ETFs and so on and so forth.

And equally important, but more controversial perhaps, we’re seeing trading being brought out of the dark and into the light, with a cap on dark trading for equities, set at eight per cent of total trading in the EU. Four per cent of total trading per venue in any one stock.

The potential impact here on equities – particularly in terms of medium and small cap liquidity – is a clear challenge for leaders, with some FTSE 250 stocks currently having anything up to 20% of their trading volume occurring away from lit venues.

So, important questions remain about how transparency is achieved without reducing liquidity, as well as important debates over the granularity of application of rules, the calibration of thresholds for large in scale, publication delays and the definition of ‘liquid’ instruments.

Finally, of course, this is legislation that has the potential to significantly affect computerised trading: both algorithmic and high frequency.

Key policy direction here includes: direct regulation of HFT firms, subjecting market making strategies to market making obligations, testing of algorithms before their execution, and formalisation of the ESMA automated trading guidelines.

Alongside this, we have market structural changes that should also make markets safer and fairer, such as requirements for circuit breakers, standards on ‘tick sizes’ and synchronisation of exchange clocks to allow better monitoring, detection and prosecution of abuse.

As a package of measures, it is difficult to argue this is without merit – and it is certainly not without global backing. So principle will become practice.

It is, however, clearly an imperative for policy makers to remain alive to the benefits of areas like computerised trading, in particular. Certainly, you don’t want to throw European markets back into a kind of pre-industrial wilderness.

Wholesale review

Where problems do exist though, and where solutions seem sensible, it is an important to look for them. And this is particularly the case for regulators, who do industry no service at all if there is no ex-ante, preventative strategy in place.

And this brings me on to my final point today, a quick reflection on the FCA’s first competition study into the UK’s wholesale markets, announced last week.

Given the vital role these markets play in the UK’s economy, it is absolutely right that we consider whether competition is working as well as it can.

When we made our initial call for inputs back in July of last year, it was because this was not an issue that had been previously fully considered.

In particular we wanted to explore whether having a strong presence in a market could impact on the quality of service for clients and make it difficult for newcomers to compete effectively. We also wanted to examine whether clients were clear on effectively what they were paying for.

This was not a decision taken in isolation. We have spent a considerable amount of time talking to a number of organisations so that we could build up a clear picture on the issues that could benefit from further investigation.

As we know, our choice of focus was investment banking – although the full terms of reference are yet to be decided.

Underpinning this decision, a variety of potential issues ranging from: poor disclosure of costs related to bundling, coupled with weak bargaining power on the client-side.

And the linked danger that new issuers, or smaller clients might struggle to negotiate effectively. The impact of cross-selling on market competition. The potential for conflicts of interest in share allocations during IPOs, and so on and so forth.

These are clearly not all high profile, public issues – but it is indicative of the preventative approach that policy makers are now more ready to take  – a willingness not just to manage conditions, but actually to ask whether they might be improvable. 

Is there, as the report last week asked, a consumer protection issue here? Are there competition issues affecting corporate clients directly, retail customers indirectly? And, ultimately, do investment bank numbers, which look healthy at first blush, translate into effective competition?

Certainly, it is easy to conflate the two – numbers and competition – when in industries like banking, dominated by information asymmetries, the presence of one does not necessarily lead to the other.  


So, a wide variety of issues here, which suggest to me that the next 10 years are unlikely to be characterised by peaceful tranquillity.

This is, of course, a challenge for leaders who have already endured a decade of change. But as has been repeated countless times over the last ten years, out of crisis comes opportunity.

And this is certainly the case today during what is a critical moment of transition. Ultimately, the big reforms succeed, or fail, on matters of small detail not initial principle.

So, our custodianship of this final translation from political priority into practice – and the corresponding balance between conduct priorities and commercial ones – is a profoundly important one.

It will also, when we look back in ten years’ time, go a long way towards determining how history judges our response to the crisis.