On March 20, the Fixed Income, Commodities and Currency Markets Standards Board (FMSB) published a draft of its transparency standard on Secondary Market Trading Error Compensation, setting out expected behaviors for the payment of compensation for trading errors.
The transparency standard proposes three methods, subject to these complying with applicable local law, for paying compensation in the event of a trading error (e.g., following a miscommunication between investor and a firm or as a result of timing issues):
- by direct payment to the compensated party’s account;
- by reducing/increasing net brokerage; or
- by another means which does not create a false market or a misleading impression of value or liquidity of a financial instrument.
The transparency standard also includes steps to follow where a material compensation payment is required, identified in accordance with policies and procedures that firms should put in place.
The transparency standard’s proposals expressly direct firms away from paying compensation using wash trades (a trade where “a purchase and sale of the same financial instrument occurs with different financial terms”), on the basis that such trades can create an artificial impression of market volume or price.
The transparency standard is open to consultation until June 20, with the final version of the transparency standard likely published shortly thereafter.
The transparency standard is available to read here.