FX Abuses Said to Persist
FX Global Code, paired with $10 billion in fines, still not enough to eliminate front-running and “last look,” according to critics.
Add Andy Maack of Vanguard Group Inc. to the list of a dozen or so executives who say that routine misbehavior in the $5.1 trillion-a-day foreign exchange (FX) market persists even after banks paid $10 billion in penalties and a trader was sent to prison.
It’s been a year since regulators and industry participants published the FX Global Code, a set of voluntary guidelines aimed at improving standards in the unregulated, over-the-counter market that was rife with misdeeds. While the cleanup effort has helped make the business more transparent, it hasn’t done enough to curb the most dubious practices, said Maack, Vanguard’s global head of foreign-exchange trading.
“I personally would have a tough time signing that document,” Maack said in an interview. “It needs to go further.”
Maack pointed to the controversial, and widely used, practices of last look and front-running as the most objectionable. A dozen industry participants agreed with him. Last look allows dealers to back out of losing trades. Front-running, sometimes called pre-hedging, is a practice in which traders make deals using advance knowledge of clients’ private order information. The code allows both under certain circumstances.
“I’m uncomfortable with a code that makes last look an acceptable practice,” Maack said. “I’m uncomfortable with a code that makes pre-hedging an acceptable practice.”
Turn the Page
Executives in the world’s biggest financial market are eager to turn the page on past missteps, which were widespread. Reminders are everywhere. In April, Mark Johnson, a former HSBC Holdings Plc trader, was sentenced to two years in prison for fraud and conspiracy to front-run a client order. Former JPMorgan Chase & Co. trader Akshay Aiyer was indicted May 10 for allegedly conspiring to rig prices. Goldman Sachs Group Inc. agreed earlier this month to pay about $110 million to resolve allegations that its traders improperly shared information about client orders in an electronic chat room from 2008 to 2013.
Aftershocks from a rigging scandal involving 16 banks continue to reverberate. Investors are waiting for payouts from a $2.3 billion antitrust class-action settlement, among the largest ever in the U.S., according to Bloomberg Intelligence. In October, a trio of British former traders is scheduled to go on trial in federal court in Manhattan. They’re accused of fixing prices by colluding in chat rooms, calling themselves “ the Cartel.” The men worked at JPMorgan, Barclays Plc, and Citigroup Inc.
The scandal prompted the May 2017 publishing of the global code. It aimed to rebuild trust and outline best practices. More than 100 market participants have pledged to adhere to the principles.
Profound Changes
Dmitri Galinov is among those saying the industry has profoundly changed. The CEO of currency-trading platform Fastmatch Inc. said conduct has improved significantly since the guidelines were published. What’s more, heightened supervision means market participants are looking over their shoulders and being more careful about how they handle client orders.
“It’s about fines, it’s about reputational risk, and nobody wants to go jail,” Galinov said. “Those are the three deterrents.”
Banks have imposed stricter compliance programs and rolled out training programs. ACI Financial Markets Association offers market participants an exam that certifies them on the global code.
“The code will not stop people from being dishonest, and nothing does,” said David Puth, CEO of FX trade-settlement firm CLS Group Holdings AG, who led a two-year effort to hammer out the standards. But, he said, the code “standardizes market practices in such a way as to ensure that all market participants have a set of guideposts by which they can operate.”
Bad Behavior
Despite these efforts to clean up the industry, market participants are still concerned about bad behavior.
Take last look, which persists in the face of opposition from some of the world’s biggest investors. Vanguard, which manages $5.1 trillion, wants it to stop, while an association of U.K. money managers overseeing 6.9 trillion pounds ($9.3 trillion) said last look can lead to unacceptable practices concerning misuse of client information. Norway’s sovereign wealth fund, the world’s biggest, also said the option to renege on quotes was exploitative in certain circumstances. In 2015, Barclays agreed to pay $150 million to resolve allegations of abusive practices relating to last look.
Even after the global code was amended in December to further restrict last look, it’s still misused, according to 12 market participants who asked not to be identified. Proponents of last look say it enables dealers to quote prices on a wide range of platforms and defend themselves against faster, more sophisticated traders.
Banning last look would save clients anywhere from $2 to $50 for every million dollars traded, according to an estimate from LMAX Exchange, a London trading platform that doesn’t allow the practice. In a market where transactions are typically quoted in millions, and sometimes billions, that adds up. One client who traded about $5 billion in currencies a day was estimated to rack up $10 million in extra costs per year because of last look, said LMAX CEO David Mercer.
Curex Group, another no-last-look venue, says it found $60 million in annualized cost savings for a client.
Fair and Transparent
Investors also remain vigilant about pre-hedging. In equity markets, front-running is forbidden by the U.S. Securities and Exchange Commission. The FX list of do’s and don’ts advises market participants to pre-hedge client orders only when acting as a principal behaving in a fair and transparent manner. That’s little consolation to investors, who are asking for more trading data and scrutinizing how much prices move in response to their deals.
“Our goal is really to guard our orders and manage them carefully to reduce that information leaking into the market,” said Joe Hoffman, CEO of currency management at Mesirow Financial Holdings Inc. in Chicago. “I think people are more inclined to protect, monitor, and verify now.”
For Vanguard’s Maack, that means watching counterparties closely and shining a light on some of the “egregious practices” that can harm investors.
“I’m never comfortable,” he said.
From: Bloomberg