The FICC Markets Standards Board (“FMSB”) has today published its second standard aimed at improving conduct in the wholesale Fixed Income, Currency and Commodities (“FICC”) markets.
The standard, which is being issued in draft form for comment, covers binary options in the commodities markets.
Binary options, also known as barrier or digital options, pay out a fixed amount, or nothing, depending on whether the underlying price of a commodity hits a pre-agreed level at a specific point in time. This creates an inherent conflict between the bank or dealer selling the option and the client.
Elizabeth Corley, Interim Chair of the FMSB, said:
“This has been a priority area for the FMSB because of the recent well-publicised misconduct that binary options have given rise to. The new standard outlines the rationale for use of binary options and also makes clear the guidelines that market participants should follow to ensure they manage the conflict of interest in an appropriate fashion.”
The new standard has been drawn up after extensive consultation among FMSB members and regulatory authorities. It is being issued in the form of a transparency draft to provide an opportunity for public comment ahead of final ratification and issuance. The binary options standard is the second to be published by the FMSB, which was set up a year ago by market practitioners following the Fair and Effective Markets Review (“FEMR”) to improve conduct in the wholesale FICC markets. It does this by defining standards of good practice in contentious or grey areas of the markets.
Last month, the FMSB published a standard on reference price transactions in the fixed income rates markets. These transactions involve agreeing all aspects of a transaction except price which is set later based on a pre-agreed reference price and market. The standard set out guidance for practitioners about what is acceptable conduct in the context of these types of transaction and create greater clarity about what good market practice looks like, and what types of practice should be avoided.”
The FMSB has 36 members reflecting the diversity of participants in the wholesale FICC markets. They include international users of the markets such as corporates, asset owners and asset managers, market infrastructure providers such as exchanges, custodians, and investment banks.
The FMSB is seeking comment from interested parties on the binary options standard over the summer. Submissions should be sent to email@example.com by midday (12:00pm BST), Friday 14th October, 2016. A final version of the standard will be published by the FMSB after evaluating public comments.