New report flags the good, bad and ugly of wholesale markets

The financial services regulator has released a new report on managing conflicts of interest in wholesale markets, after identifying that there are “significant conduct risks” that may arise in these markets that could not only harm the financial market, but also investors and home borrowers.

These wholesale financial markets (wholesale markets) underpin growth in Australia’s real economy, the Australian Securities & Investments Commission (ASIC) outlined in its REP 742 Managing conflicts of interest in wholesale financial markets report.

However, it flagged that it had increased its focus on the conduct of participants in wholesale markets due to the “significant conduct risks” that may arise.

For example, a key component of its investigations centred on a Bank Bill Swap Rate (BBSW), in which ASIC flagged major banks had “attempted to engage in unconscionable conduct in relation to the setting of BBSW in a way that may have benefited their own interests over the interests of counterparties and clients.”

“This misconduct may have undermined market integrity and confidence in the BBSW rate set,” the regulator flagged.

Areas and processes that need to improve

As such, ASIC issued REP 742 on Tuesday (25 October) flagging better and poorer practices in wholesale financial markets.

The insights follow ASIC’s “thematic ‘deep dive’ review” of:

• Australia and New Zealand Banking Group Limited (ANZ) 
• Commonwealth Bank of Australia (CBA)
• JPMorgan Chase Bank (JPM) National Association
• Macquarie Group Limited
• National Australia Bank Limited (NAB)
• Westpac Banking Corporation

6 key findings — the good, the bad and the ugly

ASIC reviewed the practices relating to conflicts management of participants that operate in wholesale markets.

It identified better and poorer practices in six key areas (though they were not attributable to each participant reviewed).

“All participants in wholesale markets should consider whether these better and poorer practices apply to their businesses,” ASIC recommended.

The findings were:

1. Approach to conflicts management: Poorer practices included approaches that were reactive to incidents and regulatory inquiries, where controls were ad hoc and not mapped to specific risks. Better practices embedded a proactive approach for identifying, assessing and managing specific conflicts arising within each business, and across the group.
2. Operation of the control room function: Poorer practices included poorly resourced control rooms that were reliant on manual processes, where staff spent more time on data entry and record-keeping than assessing and responding to commercial and transactional conflicts. Better practices included proactive monitoring and challenging of front-office business activities by control room staff.
3. Effectiveness of policies and procedures: Poorer practices included broadly drafted policies and procedures, which led to confusion when applied to specific business activities and mismanagement of conflicts. Better practices provided sufficient detail for staff to understand how to identify and appropriately manage conflicts that may arise in ordinary business and employee behaviours.
4. Robustness of information barriers: Poorer practices failed to appropriately restrict access to confidential information. Better practices designed and implemented robust information barriers, which were continuously aligned to current business models and activities.
5. Effectiveness of staff training and awareness: Poorer practices included low levels of awareness of conflicts likely to arise across both public and private-side businesses. Training was generic and not sufficiently tailored to the specific needs of the business. Better practices conducted learning needs assessments and bespoke training on specific business activities using practical scenarios.
6. Approach to governance and supervision: Poorer practices included a lack of governance committees that regularly convened to consider conflicts and immature control functions that lacked resourcing, competency and clear roles and responsibilities in relation to conflicts management. Better practices had clear channels to escalate conflicts to committees, with clear ownership and accountability in their terms of reference.

ASIC is now actively “encouraging” participants in these markets to benchmark themselves against the above practices.

ASIC commissioner Danielle Press commented: “Wholesale financial markets, including fixed income, currencies, and commodities markets, are global, complex, and rapidly evolving.

“Because these markets underpin growth in Australia’s real economy by providing financing to governments, financial institutions and corporates, misconduct can have wide-reaching impacts.

“As such, we have increased our focus on the conduct of participants in this sector.

“High standards of conduct and oversight, such as the better practices in the reports, strengthen market integrity and confidence in Australia’s wholesale financial markets.”

[Related: NAB settles BBSW class action]