Getting tough on the City

Law makers are getting tougher on the City of London to save its reputation, and it should fill the buy-side with renewed confidence in how their investments are handled.

Last week, the UK government announced it wishes to extend its tough rules on Libor to several key financial benchmarks across rates, precious metals, FX and oil.

The Libor rules were brought about in the wake of the Libor scandal, where it was discovered that many traders had deliberately sought to manipulate the key financial benchmark, which affects the cost of a wide range of products, ranging from savings accounts and mortgages to derivatives. So far, 10 firms have been fined US$6.5 billion for their role in rigging Libor and there remain several ongoing investigations.

Just this morning, Lloyds bank announced eight staff had been dismissed and had £3 million of bonuses withheld due to their role in manipulation that led to the bank’s £226 million Libor rigging fine.

By extending these to other benchmarks, traders found guilty of manipulating these other rates could face substantial personal fines and be subjected to criminal sanctions.

The UK’s Treasury said its clampdown is intended to help improve confidence in the integrity of the City of London to maintain its role as a major financial hub.

It will also be welcome news for the buy-side and offer further empowerment. Scrutiny of the way the sell-side behaves and the impact it can have on the returns of institutional investors has been ratcheting up in recent years across a variety of fronts, from transaction costs analysis, commission unbundling and now the way benchmarks are calculated.

One of the new benchmarks facing criminal level sanctions is the ISDAFix benchmark that is used to calculate swaps contracts. Governance of the benchmark has already been transferred to the independent ICE Benchmark Administration, which also took over responsibility for calculating Libor at the beginning of the year.

That governments are taking such a tough stance on the City indicates they are taking the concerns of investors seriously. The buy-side needs to have confidence that the contracts it enters into are being calculate correctly and are in turn facing pressure from their own investors to ensure they receive value for money. These concerns are now being addressed, not just on financial benchmarks but in areas such as venue routing, seen as essential to protect investors from potential predatory high-frequency trading activity.

FIX Trading Community is about to release its new specifications for Tag 30, which will enable buy-side firms to get a detailed view of the venues their orders visited on the path to execution.

As more information becomes available, on how benchmarks are calculated or how orders are treated, institutional investors will be better equipped to answer tough questions from end investors and rebuild some of the confidence that capital markets have lost in recent years.