Fixing Financial Markets: The Osborne Way

All eyes were on George Osborne this week, as the UK’s Chancellor of the Exchequer set out his proposals for strengthening the financial markets. Putting rumours about the content of his recent Mansion House speech aside, Osborne announced a joint review between the Treasury, the Bank of England, and the Financial Conduct Authority (FCA) into the way wholesale financial markets operate. The ramifications of the review will not only influence London, but all of Europe and, in domino effect, quite likely the global markets themselves in setting tone, approach, and market impact.

Regardless of the outcome of this week’s announcements, Osborne’s bringing together of a range of stakeholders and participants within the financial markets is essential. It will undoubtedly ensure that the appropriate regulation is put in place, as well as create fair, orderly, and transparent markets. A major concern, however, is that this initiative will fall short of its intended impact.

In order for Osborne’s suggestions to succeed, he should work to ensure that any regulation is specific to its asset class – a transaction in one asset class is not the same as a transaction in another, and all have market impacts in different ways. His approach must be relevant and ‘fit for purpose’ for each specific area.

There is no room for error – for example, the FX market is vital for London and it needs to be functioning efficiently and effectively to keep the city as one of the top global financial centres.

We know that financial institutions are seeking clear, but relevant, guidance on FX. To get this right, as Osborne works through the current functioning regulatory channels, we hope that he involves those who are experienced with the specific issues germane to FX from the very beginning.

Now Osborne’s primary intentions are clear: to foster greater effectiveness in London’s markets. But the big question is how this will work in practice. Europe itself sets financial regulation – this is not done at the nation state level. A vast swathe of regulation has just been passed, so what will be the appetite for developing even more regulation? In the current set up, will Osborne go to Europe for buy-in or go it alone? Only time will answer that.

If Osborne can make further change a reality, we’ll see tighter FX regulation in the UK compared to the rest of Europe. This is good – but we must bear in mind that this also sets up the potential for exploitation and that could make the whole market somewhat inefficient if not handle in tandem with a broad set of market participants.

This could run counter to the G20’s attempt to harmonise global financial services regulation and its market abuse paper on that topic issued last year. Regardless, it’s still a good first step to have tighter FX regulation in the UK as a starting point objective.

This scenario also raises a bigger question related to how financial services regulation is developed. Two enormous pieces of regulation have just been passed in MiFID II and MAD II, and the industry is now working hard to implement them. While the regulation of the FX markets is long overdue, why was it not part of the recent rule changes?

On a related point, the biggest interest circulating in the rumour mill was that Osborne might lobby for the UK to opt out of the EU’s Market Abuse Directive, and write its own specific legislation. This effort could leave the London market puzzled as to whether this would lead to a regulatory arbitrage, or make trading financial instruments across European borders difficult if the core regulatory framework didn’t match up with all the participants.

A more collaborative approach to setting regulation is required that involves regulators, politicians, and real subject-matter experts. This is the only way to avoid the politicisation of financial regulation and ensure a clear path forward for the financial services sector.

*Content originally published by Matt​ Coupe

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