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And Another Thing…

Chatting to a friend the other day he asked the question (regarding the Fix/chatroom issue) “do you think this will just fizzle out?”

It’s an interesting question because although it seems impossible to see how it can, with all the press and political attention currently on it, I suspect it will. Partly this is because a lot of politicians have the attention span of a three year old and there will soon be another scandal for them to get on their soapbox about, but more pertinently (and more seriously) the remedial work will help to ensure it does.

I continue to see criticism of the Grabiner Report misguided; this week a UK MP with an eye to main chance has joined it, and, like the DoJ, he appears to be suggesting that the Bank of England was somehow complicit in the whole affair. Rubbish. This remains an incidence of someone not escalating an issue and little more – not only was the Old Lady not involved directly in the Fix but it was also, for a chunk of the time in question, not the UK banking regulator.

To the question of the whole issue fizzling out, I suspect it will because much of the work that needs to be done has been and in some instances more than needs to be done. Sales teams are communicating according to strict guidelines, customer information is more securely held and Fix business (and in many case all client orders) are ring-fenced from the trading and sales desks.

Strict controls on chat rooms (where they are even allowed), greater oversight of dealing operations and communications generally, and a new framework for the Fix itself are also in place, helping to reduce opportunities for malpractice. Furthermore, work is underway to get a truly global code of conduct, across all jurisdictions (as well as across the FICC spectrum as opposed to just FX) to remove any grey areas for possible miscreants’ use in the future.

Most importantly though, there is an understanding on the part of the people in the industry about what is, and is not, acceptable. Crucially, this includes customers, who are coming to realise that the relationship has changed irrevocably. Not only do they have to pay for risk transfer at the Fix, but other customers who never used the Fix now understand the new rules around market.

This is in no way a defence of what I insist were illegal acts by a few in front running orders, but the role of customers in what happened to our industry should not be under-stated. Legion are the stories of those customers that wanted to know everything about everybody else, but didn’t want their own business discussed. This was not a deliberate act on the part of clients, rather it was just how things were done – natural competition forces blurred the lines and led to more information being published than was prudent and a service such as the Fix being given away for free (actually at a cost often, to the individual dealer).

We all know how difficult it is changing customer habits – just witness how many asset managers still use the Fix and the standing instruction methods to hedge themselves – which is why the FSB plays such a crucial role. The markets themselves could never get clients to change how they operate and, more importantly, what they pay, but a global body, that sits above competition lines, can, and has, done so.

With a more realistic relationship in place it is easier for a bank to enforce behavioural guidelines. Again, this is not a defence of what went on, rather it is to say that a level playing field of sorts has been established. And for the customer that bemoans the increased cost of trading I would suggest they look at the spreads they are getting for their (non-Fix) business compared to 10 years ago. Aggregation has infused competition meaning the risk transfer price for a reasonable chunk of business is much tighter than it was – in spite of all the talk of banks pulling back from the market.

This is because the banks have not pulled back from the market at all – rather they have collectively pulled back from certain aspects and venues. The traditional customer business still goes to the banks because firstly those institutions understand the wider value to the organisation from that business; and secondly because of the aforementioned reluctance on the part of customers to change how they operate.

This leaves us with a status quo of sorts. There is still a potential problem in the shortage of dealers able to handle larger risk and physically handle the level of voice business (and incidentally I was interested to read earlier this week someone proudly pronounce that e-FX has now overtaken voice – I was under the impression that the FX committee surveys showed that some time ago, but never mind) but, generally speaking, what work needs to be done has been done in this area.

One challenge for the industry is that dealing is, to quote a friend of mine still in the business, “not as much fun as it used to be”. I argued when I heard that statement that ever since 50% of spot went electronic back in 2010-11 that was the case, but I suspect my friend, being like myself a little “old school”, was bemoaning the lack of opportunities and general flow.

Equally a lot of people are leaving the industry because it is no longer “fun” and, to quote another friend, “I’m not getting paid for this [expletive deleted] the way I used to”.

This is less of a problem that it seems to my mind because even if you cut the average dealing salary by 30% it would still be attractive to the next generation, who will all, hopefully, be fully aware of what is and is not acceptable behaviour and who will understand they operate in a heavily supervised environment. The challenge is getting over the next two years which represent real gap risk.

It is impossible for this whole crisis to fizzle out completely because court cases are still likely to be brought against individuals and there are media organisations out there, some heavily involved in the financial markets infrastructure, that seem intent on not letting it die. Overall though it is hard to escape the sense that the worst is behind the industry and that the new structure, with new standards, is starting to work.  Twitter @lamboPnL

Profit & Loss

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