Financial Markets

Environment
 Financial Markets
Financial markets – are platforms or systems that facilitate the buying, selling, and trading of financial assets, such
as stocks, bonds, currencies, and derivatives.

They play a crucial role in the economy by providing a structured and regulated environment where individuals,
companies, and governments can interact.

Information Functions of financial

Aggregation Capital
and
markets for the economy Formation
Coordination

Price Resource
Discovery Allocation

Economic Indicators Risk Sharing Liquidity

 Financial Markets: Functions
Resource Allocation Financial markets allocate resources efficiently across the economy. This helps in maximizing economic output and growth.

Price Discovery Markets determine the prices of financial assets through the forces of supply and demand. These prices reflect the value of the
underlying assets, which is crucial for making informed investment decisions. Accurate price signals allow investors to assess the value
of different securities and allocate their funds accordingly.
Risk Sharing Financial markets provide a mechanism for managing and transferring risk. Various financial instruments, such as options and futures,
allow investors to hedge against or take on specific risks. This distribution of risk helps to stabilize the economy by reducing the impact
of adverse events on any single entity.
Liquidity By offering a venue where securities can be bought and sold quickly and with minimal transaction costs, financial markets ensure
liquidity.
Capital Formation Financial markets facilitate the raising of capital by businesses and governments. Through equity and debt instruments, such as stocks
and bonds, these entities can raise funds that are used for further investment and growth. This capital formation is critical for long-
term economic development and innovation.

Information Financial markets help in aggregating and disseminating information about financial assets and their issuers. This information is crucial
Aggregation and for the efficient functioning of markets as it allows investors to make decisions based on the most current and accurate data available.
Coordination
Economic Indicators The performance of financial markets often serves as an indicator of the economic health of a country. Rising stock markets, for
instance, may indicate positive investor sentiment and a growing economy, while declining markets might signal economic troubles.
Market Types
The financial world is composed of various markets where participants can trade different types of assets. Here's an
overview of four major types of markets:

• Foreign Exchange Markets:

o Definition: The foreign exchange market, commonly known as Forex or FX, is a global decentralized or
over-the-counter market for the trading of currencies. This market determines the exchange rate for
currencies worldwide.
o Function: Participants, which include banks, financial institutions, governments, corporations, and
individual traders, engage in the buying, selling, and exchanging of currencies at current or determined
prices.

• Money Markets
o Definition: Money markets are part of the financial markets where short-term debt securities are traded.
These securities usually have high liquidity and very short maturities, often under one year.
o Function: Money markets are used primarily by participants to borrow and lend in the short term, from
overnight to just under a year. Common instruments traded in the money market include treasury bills,
deposits etc.
Market Types
• Capital Markets
o Definition: Capital markets are financial markets where long-term debt or equity-backed securities are
bought and sold. These markets are vital to the economy as they facilitate the raising of capital, the transfer
of risk, and also aid in the pricing of securities.
o Function: Capital markets include the stock market and the bond market. They are used for medium to long-
term investments and financing. Equity securities (stocks) and bonds are the primary instruments traded in
these markets.

• Commodities Markets
o Definition: Commodities markets are venues where raw or primary products are exchanged. These raw
commodities are traded on regulated exchanges, in which they are bought and sold in standardized
contracts.
o Function: This market typically includes direct physical trading and derivatives trading in the form of
futures, options, and forwards. Commodities traded are often goods of uniform quality that are produced in
large quantities by different suppliers, such as oil, gold, and agricultural products.

Each of these markets plays a crucial role in the global economy, catering to different types of financial needs and
participants, influencing everything from global finance to everyday goods.
Main economic agents
The main economic agents—households, firms, governments, and the financial sector—play critical roles in shaping
the dynamics of financial markets. Here's how each can impact financial markets:

• Households:
o Investment and Savings: Households influence financial markets through their decisions on saving and
investing. High savings rates can lead to increased capital available for investment in financial markets.
Conversely, low savings may reduce capital flows into markets, impacting liquidity and potentially
increasing volatility.
o Consumer Confidence: The overall sentiment of households about the economy can affect financial
markets. High consumer confidence often leads to increased spending and investment in equities, while low
confidence might result in higher demand for safer assets like bonds or gold.
• Firms:
o Corporate Actions: Companies impact markets through decisions related to dividends, stock buybacks,
issuance of new shares, and mergers and acquisitions. Such activities can lead to fluctuations in their stock
prices and those of their competitors, affecting market indices and investor sentiment.
o Earnings Reports: Regular financial disclosures and earnings reports provide insights into a company’s
performance, influencing investor decisions and stock valuations.
Main economic agents
• Governments:
o Policy Decisions: Governments can influence financial markets through fiscal policies (taxation and
government spending) and monetary policies (control of money supply and interest rates). These policies
can alter investment yields, affect consumer spending, and overall economic growth.
o Regulation: Regulatory frameworks established by governments shape the operational landscapes of
financial markets. Changes in regulation can affect sectors differently, impacting stock prices, market
practices, and investor confidence.
• Financial Sector:
o Banks and Financial Institutions: As major players in the financial markets, banks and other financial
institutions affect liquidity and credit availability. Their lending policies can determine how easy or difficult
it is for companies and households to access funds, influencing spending and investment behaviors.
o Market Sentiment and Speculation: The financial sector also impacts market sentiment through analysis,
forecasts, and speculative activities. Investment banks, hedge funds, and other large financial players can
move markets significantly based on their trading strategies and market positions.

Each of these agents interacts within an intricate ecosystem where their decisions and behaviors can amplify or
mitigate each other's effects, leading to complex dynamics in the financial markets. Their influence is also heavily
mediated by external factors such as global economic conditions, technological advancements, and geopolitical
events.
 Market Segmentation
Financial markets can be segmented in various ways based on different criteria, each of which helps to understand
the structure and operation of the market.

• Term to Maturity
o Short-term Markets (Money Markets): These markets deal with securities that have short-term maturities,
typically less than one year. Examples include treasury bills, commercial paper, and certificates of deposit.
o Long-term Markets (Capital Markets): These markets involve longer-term securities such as bonds and
stocks, which generally have maturities longer than one year.
• Product Phase (Primary and Secondary Markets)
o Primary Market: This is where new securities are issued and sold for the first time. Companies,
governments, or public sector institutions raise funds through IPOs (Initial Public Offerings), bonds, or
other instruments.
o Secondary Market: Once securities are issued in the primary market, they are traded among investors in the
secondary market. This market provides liquidity and pricing for the securities.
• Trade Dates and Settlement Dates
o Spot Markets: Trades are made "on the spot" with immediate delivery, or settlements usually occur within a
short period, typically two business days after the trade date.
o Futures Markets: In these markets, the trade and the settlement occur at specified future dates. These include
commodities, futures, and options markets.
 Market Segmentation
• Location and Regulation
o Domestic Markets: These operate within a specific country and are regulated by domestic financial
regulators.
o International Markets: These encompass cross-border trading and are subject to international regulations
and laws, including multiple regulatory bodies.
o Offshore Markets: These are located in jurisdictions with favorable regulatory and tax regimes, often used
for transactions free from regulatory oversight of the participants' home countries.
• Dealing Structures
o Exchange-Traded Markets: Transactions are conducted through formal exchanges (e.g., New York Stock
Exchange, London Stock Exchange) that facilitate standardized contracts and have clear rules and
regulations.
o Over-the-Counter (OTC) Markets: Trades occur directly between parties without the use of a central
exchange, often involving bespoke agreements tailored to the needs of the parties involved.

Each of these criteria provides a unique way to categorize and analyze financial markets, helping participants
understand the complexities and operational characteristics of various market segments. This segmentation also aids
in regulatory oversight and in tailoring investment strategies to specific market characteristics
Cash/Spot Market
• Immediate Transactions: In the cash or spot market, transactions are completed immediately. This means that the
assets being traded (like stocks, commodities, currencies, etc.) are exchanged on the spot, typically within a
couple of days after the trade date.

• Payment and Delivery: Payment and delivery of the asset occur almost simultaneously or within a short
timeframe, generally T+2, which stands for "trade date plus two days.“

• Asset Ownership: This market deals with the actual physical or direct ownership of assets. When you buy a stock
on the spot market, you own the stock.

• Price Determination: Prices are determined by the current market conditions, reflecting supply and demand
dynamics as they exist at the moment of the transaction.

• Purpose: The primary purpose of the cash market is to facilitate the buying and selling of securities,
commodities, and other financial instruments for immediate delivery.
 Derivatives/Forward Market
• Contract-Based: The derivatives market involves contracts based on the value of an underlying asset. These can
include futures, options, forwards, and swaps.

• Future Settlements: Unlike the spot market, the delivery and payment for assets in the derivatives market are set
for a future date. The terms of this future delivery are agreed upon when the contract is entered into.

• Risk Management and Speculation: Derivatives are often used for hedging against risks or for speculative
purposes. They allow traders to manage financial risk by locking in prices for future transactions.

• Leverage: The derivatives market typically involves leverage, meaning traders can control large amounts of the
underlying asset with a relatively small amount of capital.

• No Physical Delivery (Typically): Many derivative contracts are settled in cash rather than physical delivery of
the asset. For instance, most financial futures are cash-settled.
Cash/Spot and Derivatives/Forward
• Key Differences in use
o Investment vs. Hedging: Spot markets are typically utilized by those looking to invest directly in assets,
whereas derivatives markets are often favored by those looking to hedge against future price movements or
to speculate.
o Market Participants: While both markets attract investors and speculators, the derivatives market
additionally attracts hedgers, such as companies looking to manage their exposure to changes in commodity
prices or currency fluctuations.
o Both the cash/spot and derivatives/forward markets are essential components of the global financial system,
each playing crucial roles in trading, price discovery, and risk management.
Regulated markets
• Regulated markets, also known as exchange markets, are formal financial markets where securities trading
occurs in a structured and public environment under a set of established rules and regulations.
• Key Features:
o Standardization: Securities traded on these markets are standardized in terms of features and lot sizes.
o Transparency: Prices and transaction data are publicly available, providing transparency for all market
participants.
o Regulation: Regulated markets are closely monitored by government agencies, such as the Securities and
Exchange Commission (SEC) in the USA, to prevent fraud and protect investors.
o Centralized Trading: Trading takes place on centralized platforms, where buyers and sellers come together
to conduct transactions based on real-time market prices.
• Functioning:
o Listing Requirements: Companies must meet specific criteria to list their securities on an exchange, which
often includes financial transparency and corporate governance standards.
o Matching Orders: Buy and sell orders are matched using either an auction process (price discovery through
supply and demand interaction) or through market makers who ensure liquidity and price stability.
o Clearing and Settlement: The exchange is also involved in the clearing and settlement process to ensure that
trades are executed accurately and funds are transferred properly.
OTC markets
• Over-the-counter (OTC) markets differ significantly as they allow trading of securities between two parties
without the supervision of an exchange. These markets are less formal and are not subject to the same level of
regulation as exchange markets.
• Key Features:
o Flexibility: OTC trading is more flexible as it allows for the trading of non-standardized products and
bespoke derivatives.
o Less Transparency: Transactions are typically private, which means less price transparency and public
information compared to regulated markets.
o Counterparty Risk: Since there is no central clearing party, each party bears more significant counterparty
risk—the risk that the other party might default on the transaction.
o Diverse Products: Includes a variety of instruments like swaps, custom derivatives, and bonds that may not
qualify for listing on formal exchanges.
• Functioning:
o Dealer Networks: OTC transactions typically occur via networks of dealers or brokers who negotiate
directly with each other on behalf of clients.
o Price Negotiation: Prices are determined through negotiation between buyer and seller, rather than through a
public bidding process.
o Settlement Variability: The settlement periods and terms can vary widely and are agreed upon by the parties
involved in each transaction.
Comparative Summary
• Regulation and Oversight: Exchanges are highly regulated and transparent, whereas OTC markets are less
regulated and can be less transparent.
• Risk: Exchange markets provide a structured environment that reduces certain risks, such as counterparty risks,
which are more pronounced in OTC markets.
• Access and Participation: Exchanges have more stringent listing requirements, making OTC markets more
accessible for a wider variety of securities and participants.

Both market types are essential for the functioning of the global financial system, catering to different needs and
preferences of market participants. Regulated markets facilitate the trading of mainstream securities with high
transparency and lower risk, while OTC markets offer flexibility and access to specialized financial instruments
with tailored terms.
Types of markets and dealing structures
Regulated markets are formal systems within which financial instruments, commodities, and other exchangeable
goods are traded. These markets operate under specific regulatory frameworks intended to protect investors and
ensure fair and transparent trading practices. Here are some key types of regulated markets and their dealing
structures:

• Stock Exchanges:
o Auction Market: In this type of market, like the New York Stock Exchange (NYSE), buyers and sellers are
matched based on price and time priority. All trades occur at a single point in time during which the highest
buying price is matched with the lowest selling price.
o Dealer Market: In markets like the NASDAQ, dealers (or market makers) hold inventories of stocks and
provide buy and sell quotes for these stocks. They profit from the spread between the buying and selling
prices.
• Commodity Markets:
o Spot Markets: Immediate delivery of commodities is negotiated and agreed upon. Spot markets can be
either physical locations where commodities are exchanged or virtual platforms.
o Futures Markets: Participants agree to buy or sell a commodity at a predetermined price on a specified
future date, typically facilitated by futures exchanges.
Types of markets and dealing structures
• Foreign Exchange Markets:
o Interbank Market: The primary market for currencies, where banks exchange different currencies. It
operates on an over-the-counter basis and has a decentralized structure.
o Retail Market: Individual investors and smaller trading parties access foreign exchange trading through
forex brokers instead of direct trading in the interbank market.
• Bond Markets:
o Over-the-Counter (OTC) Market: Bonds, especially corporate and municipal bonds, are often traded over-
the-counter, where transactions occur directly between parties.
o Exchange-Traded Bonds: Some bonds, particularly government bonds, are traded on stock exchanges with
similar mechanisms to stocks.
• Derivatives Markets:
o Exchange-Traded Derivatives: Such as options and futures are traded on regulated exchanges. These
markets provide standardized contract terms and centralized clearing.
o OTC Derivatives: Contracts such as swaps are negotiated directly between two parties without going
through an exchange.
Types of markets and dealing structures
• Cryptocurrency Markets:
o Centralized Exchanges: Platforms like Coinbase or Binance where cryptocurrencies are traded under the
regulatory frameworks of the jurisdiction in which they operate.
o Decentralized Exchanges (DEX): Peer-to-peer trading platforms that do not require an intermediary or
central authority. While some aspects might be less regulated, many countries are moving towards
implementing regulatory measures.

Each type of market has its own unique dealing structures that accommodate different types of transactions,
participants, and instruments, governed by specific legal and regulatory standards to ensure stability, transparency,
and fairness in trading.
Roles of the main participants
The financial markets consist of various participants, each playing distinct roles that collectively contribute to the
market's efficiency and liquidity. Here's an outline and description of the main participants:

• Investors
o Role: Investors provide capital to the markets, either by purchasing equities, bonds, or other financial
instruments. They can be individual retail investors, institutional investors (like pension funds, insurance
companies, and mutual funds), or governmental entities.
o Purpose: Their primary goal is to earn a return on their investments through capital gains, dividends, or
interest payments.
• Issuers
o Role: Issuers are entities that raise capital by issuing securities in the financial markets. These can be
corporations, governments, or municipal bodies.
o Purpose: Corporations may issue stocks or bonds to fund expansion, innovation, or operational needs, while
governments issue securities mainly to fund public projects and manage fiscal policies.
• Brokers
o Role: Brokers act as intermediaries between buyers and sellers in the financial markets. They do not own
the securities but facilitate transactions for clients.
o Purpose: Their primary service is to provide access to the financial markets and execute trade orders. They
earn revenue through commissions and fees.
Roles of the main participants
• Dealers
o Role: Dealers are market participants who trade securities for their own accounts, acting as principals in
transactions.
o Purpose: They provide liquidity to the market by buying and selling securities, profiting from the bid-ask
spread.
• Market Makers
o Role: A specialized type of dealer who agrees to provide liquidity by always being ready to buy or sell
certain stocks at publicly quoted prices.
o Purpose: Market makers ensure that there is enough trading activity and liquidity in the market, which helps
in reducing the price volatility and makes it easier for other participants to buy or sell securities.
• Regulators
o Role: Regulatory bodies oversee and enforce laws and regulations that govern the financial markets.
o Purpose: Their objectives include protecting investors, ensuring fair, orderly, and efficient markets, and
facilitating capital formation. Examples include the U.S. Securities and Exchange Commission (SEC) and
the Financial Conduct Authority (FCA) in the UK.
Roles of the main participants
• Clearinghouses
o Role: Clearinghouses act as intermediaries between buyers and sellers in the trading of derivatives, equities,
and other financial instruments.
o Purpose: They manage the settlement of trading accounts, reduce the risk of a default by a party, and
maintain the integrity of the financial markets.
• Financial Advisors and Consultants
o Role: They provide personalized advice to investors on their financial affairs, including investments, estate
planning, and taxes.
o Purpose: The goal is to help individuals and institutions in achieving their financial objectives through
proper planning and investment strategies.
• Credit Rating Agencies
o Role: These agencies assess the creditworthiness of issuers of debt securities.
o Purpose: By providing ratings, they help investors assess the risk associated with a particular security. Well-
known agencies include Moody's, Standard & Poor's, and Fitch Ratings.

Each of these participants contributes to the dynamism and stability of the financial markets, fostering an
environment where capital can flow to where it is most needed and returns are generated for investors.
Market Making
Market-making is a financial activity where an individual or institution, known as a market maker, provides
liquidity to the market by offering to buy and sell securities, commodities, or other financial instruments at all times.
Here’s a breakdown of the function, incentives, and risks associated with market-making:

• Function of Market-Making
o Providing Liquidity: Market makers commit to buying and selling specific assets, thereby ensuring that
there is always a buyer and a seller for these assets. This activity reduces the time and effort that other
traders must expend to find a trading partner.
o Setting Prices: By offering to buy at the bid price and sell at the ask (or offer) price, market makers help
establish the buying and selling prices in the market. This action helps in the price discovery process, which
is crucial for a transparent and efficient market.
o Reducing Spreads: The spread is the difference between the buying price and the selling price. By
committing to narrow bid-ask spreads, market makers reduce the cost of trading and improve market
efficiency.
o Stabilizing Markets: Market makers can help stabilize markets by maintaining inventory and absorbing
shocks in demand or supply, thus reducing volatility.
Market Making
• Incentives to Make Markets
o Profit from the Spread: The primary incentive for market makers is the potential to profit from the bid-ask
spread. By buying at lower prices and selling at slightly higher prices, market makers can accumulate gains
through frequent trades.
o Compensation and Fees: In some markets, like those for derivatives and fixed income, market makers might
receive compensation for their role in providing liquidity, which can come in the form of direct fees or more
favorable commissions.
o Strategic Positioning: For institutional market makers, such as banks or large financial firms, market-
making activities can complement other areas of their business, such as proprietary trading, investment
banking, and portfolio management.
Market Making
• Main Risks Involved in Market-Making
o Inventory Risk: Market makers face the risk of holding assets that depreciate in value. If the market moves
against their positions, the value of their inventory might decrease significantly.
o Liquidity Risk: During periods of high volatility or market stress, a market maker may be unable to unwind
positions without significant losses. Additionally, if the market dries up, they might be stuck with assets that
they cannot sell without incurring large losses.
o Operational Risk: This includes the risk of system failures, execution errors, or issues with trading platforms
that can hinder trading activities or lead to losses.
o Regulatory and Compliance Risk: Market makers must comply with various regulations that govern trading
practices and capital requirements. Failure to adhere to these regulations can result in fines, sanctions, or
worse.
o Credit Risk: In dealing with counterparties, there is the risk that the other party will not fulfill its
obligations, leading to losses for the market maker.

Overall, market-making is a crucial activity that supports the liquidity and efficiency of financial markets, but it
comes with substantial risks that need to be carefully managed.
Efficiency of markets
The efficiency of markets is significantly influenced by the availability and transparency of information. This
concept is central to financial theory, particularly the Efficient Market Hypothesis (EMH), which posits that asset
prices reflect all available information at any given time. Here's how information availability impacts market
efficiency:

• Transparency and Price Accuracy: In a market where information is readily available and widely disseminated,
prices tend to accurately reflect the true underlying value of assets. This is because investors use this information
to make informed decisions, leading to more stable and predictable pricing. When information is scarce or not
widely available, pricing inefficiencies occur because not all market participants are making decisions with the
same knowledge base.
• Reduced Trading Costs and Improved Liquidity: Markets that are characterized by high levels of transparency
and information availability tend to have lower transaction costs and better liquidity. This is because investors
feel more confident in their trading decisions, leading to more frequent trades and narrower bid-ask spreads.
• Fair Competition and Market Participation: Adequate access to information promotes fairness in the market as it
levels the playing field among investors. Both retail and institutional investors can compete more effectively
when they have similar information. This inclusivity can increase market participation and the diversity of
market opinions, which further enhances market efficiency.
Efficiency of markets
• Risk Assessment and Management: Efficient markets allow for better risk assessment and management because
the risks associated with investing are more accurately priced into the market. This is possible when there is clear
and comprehensive information about investment opportunities and the economic environment.
• Adaptation and Response to New Information: The speed and manner in which markets react to new information
also reflects their efficiency. In efficient markets, prices adjust quickly to reflect new data, meaning there’s less
opportunity for arbitrage. This rapid adjustment process discourages speculative trading based on asymmetric
information.
• Long-Term Investment and Economic Growth: When markets efficiently process and reflect information in
prices, it supports more accurate valuation of companies and encourages investment in those that are truly adding
value. This not only promotes healthier financial markets but also contributes to broader economic growth.

In summary, the availability of information enhances market efficiency by ensuring that prices more accurately
reflect true values, reducing costs and risks, and fostering fair competition. This underscores the importance of
regulations and technologies that promote transparency and access to information in financial markets.
 Phases of a transaction
In the financial markets, transactions typically pass through several phases, from initiation to settlement and
reporting.
These phases are managed by different departments within a financial institution, namely the front office, middle
office, and back office.
Each plays a critical role in ensuring the smooth execution and processing of trades.
Let’s explore the key functions of each phase and which office is responsible for them.
Front Office
• Function: Execution
• Key Functions:
o Order Initiation and Execution: The front office is primarily composed of revenue-generating roles such as
traders and salespeople. They are responsible for initiating and executing trades on behalf of the institution's
clients. This involves communicating with clients to understand their needs, quoting prices, and executing
transactions.
o Client Relationship Management: Managing relationships with clients to ensure their needs are met and
providing them with market insights and investment advice.
o Risk Taking: Engaging in trading activities that involve risk, including speculative trading or hedging
activities to manage risk for clients.
 Middle Office
• Function: Risk Management and Compliance
• Key Functions:
o Risk Management: The middle office manages various types of risk, including market risk, credit risk, and
operational risk. This involves monitoring the positions taken by the front office to ensure they are within
the risk parameters set by the institution.
o Trade Validation and Confirmation: After trades are executed, the middle office verifies and confirms the
details of these transactions to ensure accuracy and completeness.
o Regulatory Compliance: Ensuring that all trading activities comply with relevant regulations and standards
to avoid legal or financial penalties.
• Function: Post-Trade Evaluation
• Key Functions:
o Performance Analysis: The middle office often analyzes the performance of trades to assess profitability and
compliance with the strategy. This feedback can be crucial for refining trading strategies.
o Audit and Compliance Reporting: The back office also contributes by ensuring that all trades are audited for
compliance with internal and external standards.
 Back Office
• Function: Processing and Reconciliation
• Key Functions:
o Settlement of Trades: The back office is responsible for the settlement process, which involves the actual
exchange of securities and cash between buyer and seller. This includes ensuring that securities are
delivered to the buyer, and that the seller receives payment.
o Record-Keeping and Reconciliation: Maintaining records of all transactions and reconciling them with
statements from exchanges and other financial institutions to ensure accuracy.
o Reporting: Preparing financial reports and statements for internal and external use, including reports for
regulatory bodies.
• Function: Post-Trade Evaluation
• Key Functions:
o Performance Analysis: The middle office often analyzes the performance of trades to assess profitability and
compliance with the strategy. This feedback can be crucial for refining trading strategies.
o Audit and Compliance Reporting: The back office also contributes by ensuring that all trades are audited for
compliance with internal and external standards.
Interaction and Overlap
Although each office has distinct roles, there is significant interaction and overlap:

• Communication: Regular communication is required to ensure that the front office's trading activities align with
the institution's risk appetite as managed by the middle office.
• Information Flow: Continuous flow of information is crucial, especially from the front to the middle and back
offices, to ensure that all trades are captured accurately and processed in a timely manner.

Each office contributes to the overall efficiency and compliance of the financial institution's operations in the
market, helping to minimize risks while maximizing profitability.
FX Global Code
• The FX Global Code is a set of global principles of good practice in the foreign exchange market, developed to
provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign
exchange market. It was developed by a partnership between central banks and market participants from across
the globe under the auspices of the Bank for International Settlements (BIS). The code covers key areas such as
ethics, governance, execution, information sharing, risk management, and compliance among market
participants.
• Development and Purpose:
o The FX Global Code was developed collaboratively by central banks and market participants from across
the global foreign exchange (FX) markets. Initiated in response to the lack of trust in the FX markets
following the market manipulation scandals around 2013, the development aimed to restore integrity and
confidence.
o The code was first launched in May 2017 and is a set of global principles of good practice for the FX
market, covering ethics, governance, execution, information sharing, risk management, and compliance.
• Key Features:
o It consists of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange
market.
o The code is voluntary and applies to all market participants in the FX market, encouraging transparency,
fairness, and responsibility.
FX Global Code
• Key principles include:
o Ethics: Market participants are expected to act ethically and with integrity.
o Governance: Entities are required to have robust and clear governance structures to oversee their FX market
activities.
o Execution: Principles focus on transparency and ethical behavior in the execution of trades.
o Information Sharing: Guidelines ensure that market information is shared in a responsible manner,
promoting a transparent market.
o Risk Management and Compliance: Participants must manage and mitigate operational risk and comply
with regulatory requirements.
o Confirmation and Settlement Processes: Procedures must be in place to ensure timely and accurate
confirmation and settlement of trades.
FX Global Code
• Market Participants:
o Banks and Financial Institutions: Involved in the buying and selling of foreign currencies.
o Non-bank Liquidity Providers: Includes hedge funds and proprietary trading firms that also provide
liquidity to the FX market.
o Brokerage Firms and Intermediaries: Facilitate transactions between different market players.
o Corporations: Engage in forex transactions for business operations, such as managing currency risk.
o Asset Managers: Including pension funds and investment firms, trading currencies for portfolio
management.
o Central Banks: Participate for reserves management and to stabilize their currency's value.
FX Global Code
• Scope:
o The FX Global Code is a set of global principles of good practice for the foreign exchange market. It applies
to all participants in the wholesale FX market, which includes central banks, financial institutions, and other
professional organizations engaged in FX activities.
• Applications:
o The Code covers everything from ethics, governance, execution, information sharing, risk management, and
compliance, to confirmation and settlement processes in the forex market.
• Objectives:
o To promote a robust, fair, liquid, open, and appropriately transparent FX market in which a diverse set of
participants, supported by resilient infrastructure, are able to confidently and effectively transact at
competitive prices that reflect available market information.
o To enhance the integrity and effective functioning of the wholesale FX market.
o To foster greater cooperation and communication among participants.
o To serve as a benchmark for participants to demonstrate adherence to ethical and professional standards.
Global Precious Metals Code
• The Global Precious Metals Code is similar in purpose to the FX Global Code but specifically targets the
precious metals market, including gold, silver, platinum, and palladium. This code aims to promote a fair,
effective, and transparent market. It provides guidance on ethics, compliance, risk management, and information
sharing among participants who are involved in the precious metals market, from miners and refiners to traders
and investors.
• Development and Purpose:
o Similar to the FX Global Code, the Global Precious Metals Code was established to provide a common set
of guidelines to market participants engaged in the precious metals market, particularly focusing on gold,
silver, platinum, and palladium.
o Launched in 2017 by the London Bullion Market Association (LBMA), the code aims to promote integrity
and transparency in the precious metals market.
• Key Features:
o The code addresses ethics, compliance, governance, and risk management in the precious metals market.
o It serves as a benchmark for best practices, urging participants to conduct business in a fair and honest
manner.
Global Precious Metals Code
• Key principles include:
o Ethics and Compliance: Adherence to ethical conduct and compliance with applicable laws is fundamental.
o Governance: Effective governance frameworks are crucial to manage and oversee precious metals trading.
o Transparency: Emphasizing clear and accurate communication of market and trading information.
o Risk Management: Ensuring that all risks associated with trading, including operational, financial, and
reputational risks, are identified and managed.
o Market Conduct: Encouraging responsible practices in market operations and dealings.
Global Precious Metals Code
• Market Participants:
o Mining Companies: Extract and initially sell precious metals.
o Bullion Banks: Large banks that deal in bullion and are often involved in the clearing and settlement of
metal transactions.
o Refiners: Process raw precious metals into marketable products.
o Traders and Dealers: Involved in buying, selling, and trading precious metals.
o Investors and Asset Managers: Invest in precious metals as an asset class.
o Central Banks: Manage national reserves and may engage in transactions in precious metals.
Global Precious Metals Code
• Scope:
o This Code establishes guidelines for best practices in the precious metals market, specifically covering gold,
silver, platinum, and palladium. It targets all market participants, including miners, refiners, traders, and
investors.
• Applications:
o It addresses issues related to ethics, compliance, governance, risk management, and information sharing,
much like the FX Global Code but tailored specifically for the precious metals market.
• Objectives:
o To promote integrity and transparency in the precious metals market.
o To improve fair trading practices and standardization across global markets.
o To provide a common set of guidelines to enhance market functioning and ensure fair competition.
o This code fosters integrity in the precious metals market by providing guidelines that promote fair dealing,
ethical conduct, and compliance with applicable laws. It is designed for entities involved in the precious
metals market, including gold and silver.
 United Kingdom MM Code
• The United Kingdom Money Markets Code sets out the standards and best practices expected from participants
in the UK money markets. These markets include unsecured deposits, repos, and securities lending, and foreign
exchange swaps. The code is intended to improve transparency in these markets, promoting integrity and
fairness. It covers practices related to ethics, governance, risk management, and compliance.
• Development and Purpose:
o This code was established by the Bank of England in April 2017, building upon its predecessors, the Non-
Investment Products Code and the Gilt Repo Code.
o The purpose of the UK Money Markets Code is to provide a framework of standards and best practices for
participants in the deposit, repo, and securities lending markets in the UK.
• Key Features:
o The code covers principles relating to ethics, governance, risk management, confidentiality, execution, and
settlement in the money markets.
o It emphasizes integrity, transparency, and the responsibility of participants to support the stability and
efficiency of the financial system.
 United Kingdom MM Code
• Key principles include:
o Ethics: Participants should act fairly and ethically.
o Governance and Compliance: Organizations are expected to have proper governance structures to oversee
their money market activities and adhere to the code.
o Risk Management: Proper procedures should be in place to manage risks appropriately.
o Transparency and Openness: Encourages openness and transparency in dealings to promote mutual trust and
fairness.
o Confidentiality: Information should be handled with appropriate care to protect confidentiality.
 United Kingdom MM Code
• Market Participants:
o Banks and Building Societies: Major players in lending and borrowing in money markets.
o Asset Managers: Invest and manage funds that may engage in money markets for liquidity and returns.
o Insurance Companies: Participate in money markets as part of managing their portfolios.
o Central Banks: Often involved in the operations of money markets for monetary policy implementation.
o Broker-Dealers: Act as intermediaries for other market participants.
o Corporate Treasurers: Manage corporate cash positions through activities in money markets.
 United Kingdom MM Code
• Scope:
o This Code pertains specifically to the UK money markets, covering participants involved in deposit, repo,
and securities lending markets. It's aimed at institutions including banks, financial firms, and other entities
active in the UK money markets.
• Applications:
o It outlines practices concerning ethics, governance, risk management, and transactional transparency in the
day-to-day operations of the money markets.
• Objectives:
o To support the integrity and effective functioning of the UK money markets.
o To foster participants' commitment to high ethical standards.
o To enhance the transparency and robustness of the money market framework, particularly in how
participants deal with one another.
o The UK Money Markets Code sets out the standards and best practices expected of participants in the
deposit, repo, and securities lending markets. It aims to enhance the integrity and effectiveness of the UK
money markets by promoting a framework where participants behave ethically and responsibly.
Key Aspects
• Ethics and Integrity: All three codes emphasize ethical behavior and integrity in dealings.
• Transparency and Fairness: They advocate for transparent procedures and fair market practices.
• Risk Management: There are guidelines for managing risks effectively to maintain stability in the respective
markets.
• Compliance and Governance: Each code includes a focus on strong internal governance and compliance with
local and international laws.

When an institution signs the Statement of Commitment to any of these codes, it not only pledges to follow the
principles set out in the code but also signals to the market and its customers that it operates with high standards of
integrity and professionalism. This can enhance trust among market participants and contribute to the overall
stability and efficiency of the financial markets.
Main Regulations
• Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulation
(MiFIR)
o Scope: Applies to investment firms, regulated markets, data reporting services providers, and third-country
firms providing investment services or activities in the EU.
o Objectives: Enhance transparency, increase competition, and offer greater consumer protection in financial
markets. MiFID II also aims to strengthen investor protection and improve the functioning of financial
markets making them more efficient, resilient, and transparent.
o Applications: MiFID II covers nearly all aspects of the trading system from execution of trades to reporting
requirements and product governance. Its Regulation (MiFIR) focuses on disclosure of trade data to the
public and competent authorities, mandatory trading of derivatives on organized venues, and removing
barriers between trading venues and providers of clearing services.
Main Regulations
• Market Abuse Regulation (MAR)
o Scope: Applies to all securities traded on European markets and any entities trading them.
o Objectives: To prevent market abuse through insider dealing, unlawful disclosure of information, and
market manipulation.
o Applications: It establishes requirements on disclosure of inside information, insider lists, and managers'
transactions, and provides rules on market soundings and prohibitions of market manipulation.
• Benchmarks Regulation (BMR)
o Scope: Applies to benchmark administrators, contributors, and users within the EU.
o Objectives: To ensure benchmarks are produced in a transparent and reliable manner. It aims to prevent
conflicts of interest and manipulation of benchmarks, which are critical for pricing a variety of financial
instruments and financial contracts.
o Applications: Provides a regime for benchmark administrators that includes authorization and registration,
governance and control, accountability, and the quality of input data.
Main Regulations
• Dodd-Frank Wall Street Reform and Consumer Protection Act
o Scope: U.S.-based financial institutions and their affiliates, including non-bank financial companies.
o Objectives: To promote the financial stability of the United States by improving accountability and
transparency in the financial system, to end "too big to fail", protect the American taxpayer by ending
bailouts, and protect consumers from abusive financial services practices.
o Applications: Includes measures such as stringent regulatory capital requirements, increased oversight of
financial markets, and new transparency measures for derivatives.
• European Market Infrastructure Regulation (EMIR)
o Scope: Applies to all entities that enter into any form of derivative contract within the EU.
o Objectives: To increase transparency in the OTC (over-the-counter) derivatives markets, mitigate systemic
risk, and protect against market abuse.
o Applications: Requires reporting of all derivatives to trade repositories, mandates the clearing of eligible
derivative contracts through central counterparties, and demands risk mitigation techniques for OTC
derivatives not cleared by a CCP.
Main Regulations
• Basel I, II, and III
o Scope: Global, applies to banks and banking institutions.
o Objectives: To enhance understanding and management of risks held by banks, improve their risk
management, and strengthen banks' transparency and disclosures which, in turn, enhance their stability.
o Applications:
▪ Basel I: Focused on credit risk and set a minimum capital requirement.
▪ Basel II: Introduced requirements for banks to maintain proper risk management and capital allocation.
▪ Basel III: Introduced measures to improve the banking sector's ability to deal with financial stress,
enhance risk management, and strengthen banks' transparency and liquidity.

These regulations, though distinct in their specific areas of focus and geographical application, collectively aim to
enhance the transparency, accountability, and stability of global financial systems
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