Global regulators have plans to try to tighten their grip on markets after banks were fined billions of dollars for manipulating interest rates and currencies, Britain's top financial supervisor said.
The hefty penalties on British, American and Swiss banks have forced authorities to rethink regulation for a chunk of the market hitherto left to discipline itself, said Martin Wheatley, chief executive of the Financial Conduct Authority (FCA).
"Spot gold, spot forex, Libor, all of them took us outside areas we had been historically regulating," he told Reuters.
"We have moved that regulatory perimeter through enforcement activity, but what the market is now saying is help us catch up by giving us something which tells us how you expect us to operate."
Britain and the European Union have now made rigging benchmarks including Libor a criminal offence but Mr Wheatley said standards for "navigating the nuances" of such market segments were also needed.
Plugging this gap starts next month when the FCA hosts the annual meeting of the International Organisation of Securities Commissions (IOSCO), an umbrella body for regulators such as Bafin in Germany and the US Securities and Exchange Commission. The two-day meeting starts on June 17.
Mr Wheatley co-chairs Britain's Fair and Effective Markets Review (FEMR) which publishes findings on June 10 to improve conduct standards in currency, commodity and fixed income markets to make misconduct more difficult.
These recommendations must become a template for global action otherwise FEMR may be a waste of time he says.
"You can't say here's a new regime for spot FX that is applied as a London issue only because it's a global market. One of the challenges for FEMR is how it works with global bodies," Mr Wheatley said.
"The IOSCO meeting will be an important start for that process."
He declined to detail any FEMR recommendations but said some would need changes in UK law to implement, signifying they go beyond simply updating voluntary codes of conduct as some critics fear.
That raises the question of whether regulators elsewhere in the world still have an appetite for significant reform after seven years of intensive rulemaking since Lehman Brothers bank crashed in 2008, triggering a wave of changes.
Mr Wheatley said it would require leadership to keep markets sound, a task that was a "new permanent state of affairs" and not a temporary, box-ticking exercise.
"That leadership has to come from a combination of global standard setters like IOSCO, and the drive of people who are close to it and that typically is going to be the UK and United States," he said.
The key to bringing the Americans on board will be to reassure them that further reforms would not mean unravelling the vast Dodd-Frank reform of Wall Street, Mr Wheatley said.
Republicans in US Congress are already trying to row back on elements of Dodd-Frank, which was signed into law in 2010.
The IOSCO meeting will also discuss "caveat emptor", or buyer beware, the traditional blanket fallback financial firms have used to avoid full responsibility for what they sell.
Mr Wheatley said there was a need to reappraise where caveat emptor starts as even sophisticated investors, such as fund managers, were found to need more protection.
"Where does the balance of power lie and where does the regulator step in. It won't be approval of significant new rules but it's an airing of the issue," he said of the IOSCO meeting.
Another concern is market liquidity or whether asset managers could deal with the expected big sell-off in bonds anticipated when central banks raise interest rates from their prolonged, very low levels.
Investors have been unsettled by "taper tantrums", or sharp moves in bond markets related to quantitative easing, and big currency swings when the Swiss franc was revalued this year.
But Mr Wheatley said regulators have limited powers in some cases to impose pre-emptive measures like forcing funds to hold more assets that can be sold easily even in volatile markets.
"The idea that you can put handcuffs on one of those players in those markets in order to smooth liquidity just does not work as you can't handcuff all the other players," he said.
"As a market regulator I start from the point of view that says well, actually, markets do correct. The taper tantrum? So what. We have 15 minutes of mayhem. The Swiss franc revalued and we had two hours of adjustment, but then life goes on."
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