Two vaguely optimistic columns in a week – I must be going
I have expressed the hope that the Global Code of Conduct
helps accelerate the industry’s efforts at reform – for the best part of a
decade we seemed to have been stuck in what was largely an unnoticed race to
the bottom, perhaps now the direction of travel can be firmly and irrevocably
There have been the inevitable naysayers around the Code
arguing that without real teeth it will be ineffective, however I have been
struck by the much broader consensus that something needs to be done. “Peer
pressure” is a phrase I am hearing more and more when it comes to describing
how the Code will be effective – specifically more firms are happy to suggest –
I remain optimistic this “suggest” will become a “state” – that they will
refuse to deal with non-signatories going forward.
This sentiment-driven phase in the market’s renewal needs to
be accompanied by real action, however, because there are still practices in
the FX world that sit uncomfortably with some.
One is, inevitably, last look, and while the Code is not
explicit enough for many (including me) on the practice, the very fact that one
of the newly-formed Global FX Committee’s first requests is that is it
convinced why it should not toughen
the language, suggests which way the wind is blowing on that subject.
Last look will exist in FX for the foreseeable future but
that does not mean the opportunities for abuse around the practice cannot be
Without wishing to pre-empt the GFXC’s findings, I am
willing to state that I believe the language on Principle 17 will be toughened
at some stage – if for no other reason than doing so is the right thing to do,
and a lot of people in the market agree.
One of the outcomes of the Code’s release in full has been a
definite sense that the majority of large banks in FX are content, indeed would
be happy, to see last look guidelines either be toughened, or the practice
banned in entirety.
Clearly there is a commercial motive behind this, with their
order books and client base the banks would be in a stronger competitive
position when quoting some counterparties than the liquidity recyclers, but the
very fact I appear to be sensing this mood swing is a positive.
A more direct indication of the direction of travel on last
look actually came my way this week when I was notified that Barclays has
updated its disclosure document.
Specifically, FAQ 3 in the document, states, “The receipt of
a trade request as well as any information associated with a trade request does
not influence any pricing or hedging activity undertaken by Barclays prior to
the acceptance of the trade request. If a trade request is rejected, whether as
a result of Last Look or otherwise, no information associated with the trade
request is used to influence any pricing or hedging activity subsequently
undertaken by Barclays.”
The range of disclosures around last look is nearly as wide
as Cable’s range over the past 12 months. There are some that gloss over it,
“more information can be provided by your [institution name here] relationship
manager”; while others offer what to me is the jaw dropping “this is what we do
– like it or lump it” approach.
There are are others who are much more specific, however.
Last year JP Morgan, released an updated disclosure which states, “While a
particular Trade Request is undergoing the Trade Matching process,
J.P. Morgan does not engage in hedging activity specific to such Trade
Citi has a similar approach; “While a particular
counterparty trade request is pending, subject to completion of Citi’s last
look controls, Citi does not engage in any trading activity on the basis of
that specific trade request or utilise that information for the purposes of adjusting
It’s not only the banks of course, for XTX Markets states in
its disclosure, “Where last look applies, XTX is not active in the market
during the last look window in relation to your trade request. Further, if your
trade request is rejected, XTX is not active in the market after the last look
window in relation to your rejected trade request. XTX is only active in the
market in relation to your trade request after it has been accepted.”
I know there are legal niceties involved so it’s hard for a
pleb like me to fully comprehend the meaning, but while that type of disclosure
is good because it highlights how some LPs are taking steps to ensure they
treat customers with absolute fairness, I sense the Barclays disclosure goes a
little further. To reiterate, this may be me mis-reading what is tantamount to
a legal document, but I read that as saying the bank will not use the
information for other price streams
or hedging activity as well as in relation to the specific client order.
If I am reading this right, then my hope is that peer
pressure triggers a “race to the top” when it comes to how last look is
handled. As clients understand the benefits of a stricter adoption they are
likely to trade more with the counterparty concerned as well as demand similar
standards of their other LPs. And it will only take one to leapfrog what
changed at Barclays this week for the race to accelerate.
So, as someone who doesn’t like last look but grudgingly
understands why it exists for certain counterparties who abuse liquidity, I
have to say I am happy that there appears to be a move by some (not enough!)
players that could lead to the eradication of such a reputational (and
potentially legal) issue.
At the very least I hope that these tougher approaches to
last look as exhibited by the four players mentioned above (and I know others
have similar disclosures) prompts clients to ask questions of those that, in my
view outrageously, do not meet that standard.
The Global Code isn’t leading the way on this issue, but it’s
ethos of raising standards across the industry is possibly being played out in
one area likely to cause the industry future angst. It has always been thought that the market could take the Code’s principles as a base line for conduct,
here’s hoping what we are seeing around the use of last look is that hope being