When the London interbank offered rate (LIBOR) manipulation scandal broke in 2012, Mark Yallop was horrified. He had been trading derivatives since 1984 and knew how LIBOR, which informs interest rates charged on a wide range of financial products, was set. He subscribed to the widely held view at the time that the rate-setting process involved a broad enough group of parties that it would be impossible for a single agent or group of agents to manipulate it. And yet, investigations by regulators in the UK and the US revealed that bankers in many of the world’s leading financial institutions had colluded to report false interest rates to manipulate the markets and boost their own profits.

Eighteen months later, there was more bad news as reports emerged of further manipulation – this time in the foreign exchange markets. “Because I’d been deeply involved in the foreign exchange markets, it was equally horrifying to see the kind of collusion that was reported between market makers,” Mark remembers. “Sharing information about what their customers’ orders were, what their hedging strategies were going to be, the abusive way in which they talked about their customers – all of that was a million miles away from the responsible, ethical approach to doing business that I had been taught by my seniors in the 1980s and the 1990s.”

For this reason, when he was asked in 2016 to chair the Fixed Income, Currencies and Commodities Markets Standards Board (FMSB), he felt that it was an important mission – and one that he could contribute to effectively. The private sector-led board is tasked with creating voluntary standards to help guide best practice on ethical dilemmas in the FICC sector. For example, how should you deal with conflicts of interest? Or how should you treat privileged information that you come into possession of because of your role as a market maker?

Entering the CityMark entered the City as a graduate trainee with Barings Bank, which, at the time, was one of the oldest British merchant banks in the Square Mile. Assigned to the Banking and Capital Markets division, Mark was dropped into the world of interest rate swaps, syndicated lending and leasing transactions.

In the mid to late 1990s, he was at the heart of Deutsche Bank’s expansion into investment banking. It took place at a very different economic, political and regulatory time compared to today’s environment. The euro didn’t exist, but Europe had started down the path towards a single currency.

A radical shiftIn 2005, Mark joined another inspirational figure – Michael Spencer – at interdealer broker ICAP. When Mark was trading interest rate swaps at Morgan Grenfell in the mid-1980s, Spencer had covered him as a voice broker. They had been friends for 20 years by the time Mark went to join him at ICAP, a company Spencer founded in 1986. There, Mark led the automation of ICAP’s interbank trading and post-trade activity.

Mark's CV

2016: Chair, FICC Markets Standards Board

2014: External committee member, Prudential Regulation Authority, and external member, Prudential Regulation Committee

2013: UK group chief executive, UBS

2005: COO, ICAP

1995: Group COO, Deutsche Bank AG

1985: Swap traders, Morgan Grenfell 

1982: Graduate trainee, Barings Bank

Mark says his role as chair of the FMSB is one of the standout phases of his career. Currently, membership comprises 50 of the largest firms in the global wholesale markets, from banks and asset managers to clearing houses and data providers. As mentioned, they have come together to collaborate on identifying best practice in the wholesale markets in order to ensure a scandal such as the manipulation of LIBOR never happens again.

“If you pick up a newspaper, you’re not short of negative coverage of financial services,” says Mark. “It’s been exciting, in contrast to that media coverage, to work with a group of firms who are committed to achieving change on a global scale to the way business is done in wholesale markets, and to see the early results of that initiative in the publication of standards that lay out how business should be done in a whole variety of areas. There’s a great deal more to do. We’re only in the very early stages of our journey, but it’s been an extremely rewarding one from a personal perspective.”

A response to angerThe FMSB is in part a response to the regulatory, political and public anger resulting from the instances of LIBOR and foreign exchange manipulation.

Those events prompted the then chancellor, George Osborne, to commission the Treasury, Bank of England and FCA to conduct a joint review of what had gone wrong in wholesale markets. That led to the conception of the Fair and Effective Markets Review, which uncovered a variety of questionable practices taking place in that sector, and to the launch of the FMSB.

“There had been a view before 2012 that wholesale markets would look after themselves,” says Mark. “They consisted of a group of large, sophisticated, well-resourced firms trading amongst themselves and with little to do with the retail markets. They were all, as it were, grown adults and they could look after their interests perfectly effectively.”

But, with banks using LIBOR to set retail mortgage interest rates, it became apparent that wholesale markets were highly relevant to the man and woman on the street. In the absence of formal regulations and laws defining appropriate conduct, the wholesale markets realised they needed to think more carefully about how they were operating.

Working with the CISIThe FMSB is playing a leading role in the drive to clean up the wholesale markets sector. As part of this, it has joined forces with the CISI to create a globally recognised qualification in best practice and standards for the sector. The qualification will complement existing ethics training that organisations might already offer and will focus more on imparting a basic level of knowledge and understanding about standards, as opposed to knowledge about the laws and regulations of particular jurisdictions.

The seven techniques of market manipulation

The FICC Markets Standards Board’s Behavioural cluster analysis has identified seven ways in which people have manipulated the wholesale markets over time:

1. Price manipulation
2. Circular trading
3. Collusion and information sharing
4. Inside information
5. Reference price influence
6. Improper order handling
7. Misleading customers

In July 2018, the FMSB released the findings of its Behavioural cluster analysis – a study of instances of misconduct in wholesale markets between 1792 and 2017 that covered 26 jurisdictions around the world. The study reveals that offenders essentially use seven different techniques to manipulate wholesale markets and these techniques have remained constant over the centuries (see box out).

“One of the purposes of this qualification will be to alert everybody who has a role in wholesale markets to these basic types of misconduct; what they are, how they occur, what conditions make those techniques possible, and what to do when you think you’ve got an example occurring in front of you. We want to bring everybody up to the same level of understanding,” Mark explains.

The FMSB estimates that around 300,000 people work in the global wholesale fixed income markets. In the next five years, it hopes that a high proportion of that group will have attained this voluntary qualification.

“One of the things that the Fair and Effective Markets Review strongly suggests is that there was a link between people operating in markets who didn’t regard themselves as professionals in the commonly accepted understanding of the term, and the fact that misconduct and malpractice was happening,” says Mark. “This qualification is the FMSB’s response to that challenge; it will reinforce tenets of professionalism.”

The full article was originally published in the February 2020 print edition of The Review. 

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