FMSB Releases Final Trading Platform Disclosure Guidance
Posted by Colin Lambert. Last updated: June 29, 2022
The Financial Markets Standards Board (FMSB) has released its final Statement of Good Practice (SGP) on trading platform disclosures across all financial markets and platform types, including MTFs (multi-lateral trading facilities) under MiFID II and single-dealer platforms.
The SGP observes that electronification is on the rise, especially in those markets that have traditionally lagged FX in automation, and as such it is a good time for the FMSB to remind platform operators in all sectors of the market what good practice looks like. Moreover, the intent of the SGP is to “promote consistency of key information disclosures as to how platforms operate irrespective of their regulatory classification”.
The paper observes that the development of regulatory frameworks tailored to different platforms depending on interaction types and products is desirable given the varied characteristics of such platforms. It adds, however, in certain instances there are benefits to promoting consistent approaches across platforms. “In particular, ensuring consistency of disclosures made by all trading platforms to their participants or prospective participants irrespective of their regulatory classification should both enhance market confidence and help minimise disputes between operators and participants,” FMSB states.
“Where trading platforms adopt these good practice statements, participants executing transactions on such platforms will benefit from the clarity, transparency and comparability of information relating to the operation of such platforms and the obligations they place on participants,” it adds.
The Full FX View
The initial thought when seeing this Statement of Good Practice could be to question what seems to be a duplication of work clearly already done by the Global FX Committee, but the reality is there is no bad time to remind market participants of the need to operate in a fair and transparent manner.
Equally, FMSB recently rebranded to embrace more than just the FICC markets, and as such it is important to remind participants in these markets just what is required, and importantly perhaps, how things are done elsewhere.
There is the sense though, that FMSB would be better off using FX as an example to other asset classes rather than including it so prominently in the SGPs, if some of the latter are to avoid being dismissed as an FX Global Code re-write. FMSB observes in the paper that e-ratios in fixed income more than doubled from 2011 to 2019 (it also notes that the proportion of FX e-trading rose over the same time frame from under two-thirds to over three-quarters, but presumably this is spot FX only, for the 2019 Bank for International Settlements’ December 2019 Quarterly Review indicated overall FX e-ratios at 56.4%).
As electronification grows in fixed income especially, platforms are likely to face many of the challenges that their peers in FX have had to overcome for the past two decades, and as such a sharing of experience would be highly beneficial if these markets are not to repeat some of the mistakes seen in FX.
There are those in markets who dismiss best practice guidelines as toothless and in a legal sense they are probably right – even though some jurisdictions are, for example, citing the FX Global Code as their benchmark for behaviour. The fact is though, the more we can standardise behavioural expectations in markets (rather than products), the easier it is to highlight misconduct, which is what these documents are intended to minimise.
Finally, and this is where the FMSB can benefit FX markets, it is good that principles are developed and shared across asset classes. There are, for example, undoubtedly lessons for the FX platform world from recent events at LME. Broadening the conduct discourse from FX, can only be a good thing in the long run.
The SGP offers six principles for trading platforms, the first being that clear information relating to the operation of their platform should be available to all participants. This should include how their trading interests (such as orders, quotes and requests to trade) will interact with other trading interests, when they can deem a transaction to be executed and the circumstances in which their trading interests can be cancelled, rejected or suspended.
The trading protocols available should be summarised, as should controls, platforms should also establish the level of anonymity available both pre- and post-trade, as well as the use of last look mechanisms and how rejected trades are described.
The second principle states that platform operators should make clear how trading data is disseminated to third parties, including how ‘tags’ or unique identifiers are disclosed and to whom.
The third statement taps into a current theme in metals markets especially, by reminding platforms to outline the circumstances (if permissible) in which a trade will be cancelled or amended, as well as how disputes are handled. In general, the principle looks at the process around individual trades, not at instances where, as happened with LME in Nickel, a whole day of trades were cancelled, but it does stress the need for clarity in the circumstances in which a platform can unilaterally cancel or amend trades, or when it is deemed “off-market”.
Principle Four looks at the obligations of participants when interacting with the platform and the consequences of these not being met. The obligations extend from permissioned access for individuals to the requirements for firms connecting via API – including the requirement to show adequate testing before going live.
“High quality disclosures are a crucial part of how trading platforms and liquidity providers build strong and sustainable relationships with their clients”
Mark Meredith, Citi
Principle Five is again relevant given current events at LME (as well as if an FX platform has an outage), dealing as it does with the need to disclose the types of circumstances in which a platform may temporarily cease to process orders and transactions, this should include when trading is expected to resume and the status of orders live at the time of the halt.
The final statement of good practice deals with incentives, noting, “Participants should not be incentivised to place, modify or cancel orders or execute transactions in a way which contributes to disorderly trading conditions, could constitute market abuse, or that could create or exacerbate conflicts of interest between the trading platform and its participants.
“Trading platforms should seek to prevent or mitigate, the risks associated with creating incentives, such as execution fees, ancillary fees, spread reductions and any other form of rebate,” it adds.
“We would like to thank our members for collaborating to address the important topic of disclosures to trading platform participants,” says Myles McGuinness, CEO of FMSB. “Ensuring that market participants have a solid understanding of how their trades are executed is a cornerstone of fair and effective markets, and with the ever- increasing electronification of markets, this Statement of Good Practice will help participants across the marketplace.”
Meanwhile Zar Amrolia, co-CEO of XTX, says, “I congratulate the FMSB for convening participants from across financial markets to focus on the critical topic of disclosures to participants on electronic trading platforms. The development of this Statement of Good Practice involved significant discussion between different participants which reflects the ambition of the paper to cover fixed income, currencies and commodities markets as a whole and a broad range of platforms from established MTFs (multilateral trading facilities) through to single dealer platforms.”
Finally, Mark Meredith, head of FX and local markets e-trading at Citi adds, “High quality disclosures are a crucial part of how trading platforms and liquidity providers build strong and sustainable relationships with their clients. It has been beneficial to work with the FMSB and other market participants to develop this important Statement of Good Practice.”