FMSB Publishes New Draft Standard
Posted by Colin Lambert. Last updated: October 13, 2021
The FICC Markets Standards Board (FMSB) has published a draft standard looking at conduct 0f participants in LBMA precious metal auctions – consultation on the draft is open until 3 December.
FMSB says the draft Standard is designed to provide some clarity as to the way in which regulatory and conduct risks associated with the sourcing of liquidity through an auction process which sets the LBMA precious metal price; and how both client and ‘house’ orders in the LBMA auctions, can be managed. The intent, FMSB adds, is to increase the volume of bids and offers submitted to LBMA auctions and improve the quality of price discovery resulting from them, thereby improving the effectiveness of the market.
LBMA auctions establish benchmark reference prices in certain precious metals, however FMSB says it understands that some market participants may not be submitting ‘house’ orders, i.e. those for the submitting institution itself, due to uncertainty over how to treat them alongside client orders submitted for the same fixing.
Given the reference price is used both contractually (for example in derivatives products) and as a guide to the current market price for the precious metal in question by a broad range of market participants including miners, refiners and end-users, market depth and the number of order submissions is critical to producing a representative price.
In situations where there are lower levels of liquidity in the LBMA auction the concluding price and the price observable in the market by participants at which the relevant metal is trading outside of the auction process may diverge, FMSB observes, adding increased participation in the LBMA auction, including through the submission of house orders, could help reduce this divergence and thereby further enhance the price formation process across the different liquidity pools – hence the proposed Standard.
The Standard sets out five core principles to be observed, FMSB says that applying them, participants should consider the requirements placed on them by the governing documents and applicable regulation. “In particular, Participants should consider their systems, controls, policies and procedures that cover their use of client confidential information within the bounds of legitimate market-making,” it adds.
The principles covers the submission and management of house and client orders; the use of confidential information (specifically from client orders) as part of the submission process; and the addressing of any conflicts of interest. Underpinning the guidance is the necessity to ensure the client is not disadvantaged by the participant’s actions.
The Standard further discusses the business structure that could help participants manage these risks, including the use of segregated trading desks, and provides examples of how conduct risk can be managed in these situations.
The full paper can be accessed here.