FCA to begin major review of wholesale financial markets

The logo of the new Financial Conduct Authority (FCA) is seen at the agency's headquarters in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren

By Huw Jones

LONDON (Reuters) - Britain's financial regulator will start a root and branch review early next year of whether wholesale markets used by banks, fund managers and exchanges are competitive.

"This will be a wide-ranging piece of work and, as part of it, we will be inviting market participants to tell us where they currently encounter issues," David Lawton, director of markets at the Financial Conduct Authority, said on Tuesday.

The FCA was launched in April with a mission to protect consumers better after a string of mis-selling scandals left them out of pocket.

Lawton outlined how the new watchdog will also change the way it supervises wholesale markets after the scandal over the rigging of Libor benchmark interest rates by banks.

The FCA will use new competition powers to make changes in the way these markets operate. Wholesale financial markets cover stock exchanges as well as bond and derivative trading by banks, brokers and asset managers.

"We believe this work will be an important step forward in using the competition objective to bring about better outcomes for consumers and market integrity in the wholesale markets," Lawton told an FCA conference on markets.

One issue the FCA expects to crop up in the review is the price exchanges charge for their data on share trading.

Big asset managers have complained at having to pay a plethora of exchanges for their data to obtain a pan-European snapshot of the market and check if they are getting the best offer prices.

Another issue is co-location or where exchanges offer a premium service to participants who are allowed to place their computer servers next to the exchange to get the fastest trading speeds possible.

Some investors view this as a two-tier market that creates unfair advantages.

Over the next five years, the watchdog expects to be using its competition powers in the wholesale market as actively as it will be in the retail market, an FCA official said.

The FCA can generate structural changes in the market to increase competition by issuing new rules and guidance, curbing what firms can do and take enforcement action.

(Editing by Jane Merriman)