Trust is the cornerstone of all financial transactions. It underpins the relationship between counterparties and is essential to the effective functioning of complex financial markets.
Following the financial crisis, it has become essential that we work to re-establish the highest standards of behaviour and best practice in the financial markets. The new, voluntary UK Money Markets Code, published this week, is an important step on that path of restoring trust.
The funding and liquidity markets covered by the new Code play a crucial role in the UK financial system; there are over 3,000 transactions with a total value of over £160bn every day in the sterling deposit and repo overnight markets alone. The scale of these markets underlines the importance of adhering to high standards of ethical behaviour.
The Code sets out a clear, principles-based framework for how all participants are expected to act in a manner that promotes the integrity of the UK money markets. It covers governance, risk management and execution practices for the UK deposit, repo and securities lending markets.
It also sets out best practice when dealing, confirming and settling trades, an area where bad or inconsistent practice can lead to increased error rates, failed trades or possible market disruption. The standards and practical examples set out in the Code will provide greater clarity for market participants about the behaviours expected of them.
Importantly, it has been written by the market, for the market: over the past 12 months, a representative group of experienced professionals have worked together to codify expected standards. And the Bank of England Money Markets Committee, comprised of senior representatives from across the UK money market, has endorsed the new Code as providing appropriate guidance for participants. The sub-committee responsible for drawing up the Code, which I co-chair, will remain in place to ensure the Code remains relevant and up to date as markets continue to evolve.
We encourage all participants in the UK deposit, repo and securities lending markets to use the Code and embed the best practices it describes within their business. The Code contains a Statement of Commitment to allow firms to demonstrate publically their commitment to the principles outlined.
Adherence to the Code is designed to be proportionate, rather than onerous. If a firm only uses one part of the money market – for example, only making unsecured deposits – there is no need for it to consider how it will follow the standards for the other markets.
Some might question whether such a Code can ensure good behaviour without regulatory teeth. Such scepticism can only be assuaged by persistent and consistent good conduct. But market participants can make a start now by demonstrably embracing the new Code. In fact, we hope that most firms will be in a position to make this commitment in early 2018.
If they do, then the publication of the Code, to be followed shortly by the related FX Global and Precious Metals Codes, will mark an important step towards the restoration of fair, effective and transparent wholesale financial markets operating in London – to the benefit of market participants and end-users alike.