Managing Wholesale Market Conduct Risk

Wholesale market conduct risk is an area of increasing supervisory focus, including on the part of the Central Bank of Ireland. Entities may need to take steps to ensure they adequately identify the market conduct risk to which they are exposed, and take the necessary measures to properly mitigate and manage that risk.


Wholesale financial markets play a critical role in global and national economies and misconduct in those markets could undermine their integrity and overall effectiveness, as well as giving rise to systemic financial risks.  According to IOSCO, at the most basic level:

“misconduct in wholesale markets involves behaviour or practices that are inconsistent with jurisdictions’ laws, rules, principles and objectives of financial market regulation that have been developed to address realized or potential market failures.”

The past few years have seen a number of international efforts to reduce the risk of misconduct in wholesale financial markets. As part of these broader international efforts, in September 2015, IOSCO established a Market Conduct Task Force to conduct a review of IOSCO members’ existing conduct approaches and the work IOSCO had completed in the area.

Subsequently, in June 2017, the Task Force published its Report on Wholesale Market Conduct (the “Report”), which addresses the misconduct of participants (including firms and market professionals) which may undermine the operation of and trust and confidence in wholesale markets. For the purposes of the Report “wholesale markets” are described as:

“those markets that predominantly consist of professional counterparties where both counterparties are persons or firms that are considered more sophisticated than typical retail customers or participants.”

Among other things, the Report:

  • describes wholesale markets and the particular characteristics common to these markets which may give risk to misconduct;
  • outlines some broad expectations of conduct for individual market participants in light of the risks of wholesale market misconduct (namely, honesty, integrity, conflicts management, competence, and communication and confidentiality);
  • sets out a suite of tools used by one or more regulators to address misconduct in wholesale markets; and
  • provides an overview of how market regulators help ensure that firms and individuals meet their obligations.

The Central Bank and Wholesale Market Conduct Risk

Over the past few years, the Central Bank has developed new, more systematic capabilities to supervise conduct in wholesale markets, due to the increase in scale and sophistication of wholesale financial market activity carried on in and from Ireland and by branches of Irish firms in other jurisdictions. These developments included:

  • the deployment of a newly established Wholesale Market Conduct Team, tasked with carrying out market conduct assessments of firms engaging or applying to engage in wholesale market activity;
  • the publication of an industry communication, in March 2019, setting out the Central Bank’s expectations in respect of how such firms identify, mitigate and manage market conduct risks (the “2019 Communication”); and
  • carrying out a thematic review of regulated entities’ effectiveness in identifying and assessing wholesale market conduct risks.

On 21 January 2020, the Central Bank published a further industry communication (the “2020 Communication”) describing the key findings arising from its work in 2019.  The central theme underpinning those findings is that entities may not have been adequately identifying the market conduct risk to which they are exposed and, consequently, have been failing to mitigate and manage that risk.  According to the Central Bank, these failures stem from inadequacies in the governance, and the establishment, of risk frameworks for market conduct risk and the failure to identify market abuse. In light of its findings, the Central Bank:

“expects market participants to place a renewed focus on ensuring they have in place frameworks that effectively protect the best interests of investors and that they operate in a fair, orderly and transparent manner.”

According to the 2020 Communication, the Central Bank’s supervisory work in 2020 will include focussing on regulated entities’ ability to identify market conduct risk, the extent to which they are sufficiently well controlled to govern market conduct risk; and the flow and escalation of conduct-specific information within and across regulated entities and groups.

The Central Bank also expects to devote considerable supervisory resources to examining the compliance by regulated entities and issuers with their obligations to recognise and manage inside information and in the case of relevant regulated entities, to identify suspicious transactions and orders under the Market Abuse Regulation 596/2014.

Next Steps for Market Participants

Each wholesale market participant should review the frameworks, policies, procedures and practices that it has adopted in respect of wholesale market conduct risk to ensure that these address, or continue to address, the expectations set out in the 2019 Communication and the Central Bank’s 5 principles for a proper and effectively regulated securities market, namely, a market that:

  1. provides a high level of protection for investors and market participants;
  2. is transparent as to the features of products and their market price;
  3. is well governed (and comprises firms that are well governed);
  4. is trusted, by both those using the market to raise funds and those seeking to invest;
  5. is sufficiently resilient to continue to operate its core functions in stressed conditions and is able to innovate appropriately as markets evolve.

It should also review the expectations set out in the 2020 Communication and address misalignments between those expectations and its internal frameworks and practices.

An issuer should focus on ensuring that it has in place systems and controls to ensure compliance with its obligations under the Market Abuse Regulation and related legislation.  

You will find the Central Bank’s 2019 and 2020 Communications here.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.