The Futures and Options Association (FOA) is calling for the UK's Financial Services Authority (FSA) to drop controversial proposals for the use of price benchmarks to demonstrate best execution in dealer markets.
Proposals for the possible introduction of price benchmarks were outlined in a FSA discussion paper released earlier this year. The use of benchmarks would be introduced in order to ensure compliance with the 'best execution' requirements of the European Union's Markets in Financial Instruments Directive (MiFID).Download the document now 221.7 kb (Adobe Acrobat Document)
But the FOA, which represents the derivatives industry, is urging the regulator to allow firms to decide the process and the factors relevant to measuring 'best execution' and argues that there are more appropriate means of measuring price in certain illiquid markets than benchmarking.
The FOA says research it commissioned from KPMG backs up its stance. In the report KPMG observes that price is only one of the several key factors taken into account when determining best execution and while benchmarking can be used to measure price in the more centralised and standardised markets, such as the equity markets, other methodologies are more appropriate for the quote-driven and structured products markets - a view echoed by other industry groups.
Nigel Harman, head of corporate and investment banking at KPMG, says the points of view of a variety of market participants, including firms on the buy-side and the sell-side, were considered for the report:
"We found a striking consistency of view in our discussions with our clients and other market firms: a workable outcome would allow a combination of approaches to demonstrating best execution, including the use of reliable benchmarks where they are available," says Harman. "We also believe this outcome would be consistent with the objectives of MiFID."
Anthony Belchambers, chief executive of the FOA, says the report demonstrates that, while price benchmarking has a part to play in some markets, there is no single approach to best execution that suits all markets. In line with MiFID's principles-based approach, what is 'best' should be judged by a firm in the context of the client's objectives and the type and state of the market at the time of the transaction.
"If UK regulated firms are to meet the current very tight timetabling for implementing MiFID on time, it is essential that the FSA adopts a very focussed and disciplined approach to transposition and allows the firms to concentrate their resources on implementing the essential and necessary requirements of the directive."
Earlier this year a group of 11 UK trade associations formed an entity called Mifid Connect - chaired by the FOA's Belchambers - in a bid to influence the way MiFID is implemented in the UK. The group is lobbying to establish a "practical, cost-effective and market-sensitive policy" on the directive's implementation.
In July the London Investment Banking Association (Liba) said many firms have stopped work on planning for the implementation of MiFID because of practical concerns over the FSA's benchmarking proposals. Belchambers agrees that the debate about price benchmarking in dealer markets has been "an unfortunate distraction" to the core objective of implementing MiFID.
Last month the International Capital Market Association (Icma), the International Swaps and Derivatives Association (Isda) and The Bond Market Association (TBMA) raised their concerns in response to the FSA proposals and warned that the imposition of benchmarking would be expensive to implement in practice and could potentially lead to withdrawal of liquidity.
Read KPMG's report Interpreting 'Best Execution' in the Dealer Markets here: