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FMSB Releases Draft Standard for Compensating Trade Errors

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):

  1. by direct payment to the compensated party’s account;

  2. by reducing/increasing net brokerage; or

  3. 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.

©2018 Katten Muchin Rosenman LLP

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About this Author

John Ahern, Financial Attorney, London, Katten Law Firm
Partner

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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