With a reminder to readers that there is still time to vote for a real Irrational – P&L’s Socks of the Year (click here), let’s move onto to the next accolade, the “It’s been a tough year for…” award. 

The winner might come as a surprise because I, along with many, feel the FX Global Code has made decent progress this past year and has also done a lot of good for the market by providing a clear framework within which people can work. It has done all of that, however it has also faced some challenges and if it is to overcome them it will need the support of the whole industry.

I consider myself fortunate to have not been too closely connected with the legal system because it is a very confusing place. I remember one jury service I completed many years ago in which the jury found the accused guilty, the judge accepted the verdict, noted that the accused had at least 10 previous convictions for the same offence – and then let him off with a small fine!

Trying to understand the outcomes of different cases brought by the US government against members of the foreign exchange industry this year, I have that confusion all over again. I am still trying to understand how the same justice system can find one man guilty when all he was doing was prudently hedging a very large position, and then find three other men innocent when they were obviously colluding and inappropriately sharing information.

In FX Global Code terms, a practice that it endorses (with the appropriate disclosures and intent of course) was deemed worthy of a jail sentence by a US judge, while a case that surrounded behaviour that the Code explicitly warns against – the inappropriate sharing of information – ended in an acquittal. Go figure.

To lay my cards on the table, I don’t think either case should have got as far as a court room, but they did, for whatever reason, and looking back from the perspective of the end of the year, I don’t think the industry has any better understanding of what or what will not, land you in on the wrong side of a US criminal charge – and that is a challenge for the Code going forward.

If we were going to have a Statement of the Year a genuine chance for laurels could be the jury foreman in the trial of the Cartel who observed that the case was easy to decide “because everyone was doing it”. Regular readers know exactly how much I detest the concept of a rigid adherence to Tracking Error and this seems to be a major case of that – is it OK to say that something is acceptable because everyone does it? Either way, that case ended happily with no one going to jail and it is to be hoped, having immersed myself in the evidence this year, that the same outcome awaits Mark Johnson’s appeal. Whatever the result, however, I don’t think we are any closer to understanding what the US legal system thinks is acceptable when it comes to pre-hedging or information sharing.

I found the somewhat hysterical reaction of those (typically in the media) who saw the acquittal of the Cartel as a signal for the market to go back to inappropriately sharing information ridiculous. Worryingly, however, it also highlights an ignorance of the Code, for had those “expert” commentators bothered to read the document they would find it explicitly forbids the inappropriate sharing of information.

Certainly I don’t think there is anyone in the foreign exchange industry that doesn’t understand that – which tells me it won’t happen again on the scale it did, and if incidents do arise they will be dealt with easily and quickly. That is what happens when the industry’s major participants sign up to a set of principles. 

This is the paradox with the Code. There is so much to like about what has been achieved and it has created an environment in which “I didn’t know” is no longer an excuse. Conversely it still suffers from the sceptics’ argument about how it can be enforced – and the legal outcomes thus far in the US are not helping, being as counter-intuitive as they are.

Of course the Code is a reaction to historical events, specifically those that are the subject of the huge number of lawsuits and criminal charges over the past couple of years, so therefore it can be argued it should just ignore a US court’s decisions, but that is a brave call. At some level the Code needs to be aligned with the relevant legal codes.

So my latest Irrational actually does, at face value, seem illogical. It has been a tough year for the FX Global Code because random jurors and judges, who know little or nothing about the workings of the foreign exchange market and the risks associated therein, have in directly signalled that two of its principles may be wrong. We all know they’re not of course, but explaining that to a US judge and jury is apparently a very difficult thing to achieve!

So while we focus on the buy side outreach (and you would think that at least those firms currently suing banks for billions of dollars would signal their willingness to support good practice by signing up) and stronger disclosures, both of which are important issues for the industry, the real challenge to the FX Global Code may end up being the decision of a few non-industry people in courts rooms around the US. Fair? Absolutely not, but it is the reality.


Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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