The news this week that the US government has failed to prosecute another FX trader  – the latest being former Barclays FX head Robert Boguckiis yet another indication of both the eagerness of the authorities there to have a “head” to represent the general misconduct of bankers, as well as those same authorities’ lack of understanding as to how the FX market works. It also shows that throwing all non-bank counterparties into the “unsophisticated” tray together is a scatter gun approach to actually defining how much these counterparties know themselves about FX markets.

Hewlett Packard was clearly running a professional treasury, and I would argue that several other alleged “victim” companies would be also. Look at the case of Mark Johnson, where Cairn Energy, also a professional treasury but not on the scale of HP, hired Rothschild as an adviser. The mere act of appointing an adviser does not indicate a lack of understanding, it’s more of an admin thing – the treasurer doesn’t want to waste countless hours going through the RFP process (and I think at some stage maybe questions should be asked of how expert the advice to Cairn was).  

Reading through the judge’s finding in the US in the case of Bogucki the lack of transparency between what were obviously two professional trading desks was striking. The judge noted in his dismissal order that both parties “engaged in ‘bluffing’ and ‘BS-ing’ and were less than honest with each other and as I revealed this week senior managers in bank FX businesses have told me that their firm was approached by HP about the deal.

An “unsophisticated” market participant would not engage in what the judge found to be deliberate deception, what would be their incentive? In playing the game they are revealing themselves to be fully aware of how things work. In the Cairn case, there are emails from the head of treasury stating that HSBC would make money from the trade by buying ahead of the Fix – an unsophisticated counterparty would not understand that surely?

Going back to HP apparently sharing details of the order with third parties, that is their right of course. Many companies still have asking multiple counterparties as their best execution policy even if it often leads to a worse outcome as liquidity providers seek to protect themselves from “winner’s curse” or “adverse selection”. 

Companies need to be careful of this, especially around with whom and exactly what information they share. If a customer asks a bank for an indicative one way rate for a particular trade they are expressly sharing that information with the bank and therefore the latter is constrained in how it can act on the information.

If, however, the customer asks four banks for a two-way rate in size they are not giving anything away – apart from the fact that a large ticket might be hitting the market at some stage. Without specific information, those banks that don’t win the trade merely have to keep their eyes and ears open – it will show up at some stage. 

It is also impossible in the case of both Barclays and HSBC (as well as any other institution or trader caught up in these court cases) for the bank, or more specifically the trader, to leave the market alone while they deal with the customer order. The US government’s position – which has oscillated considerably during the Johnson trial and appeal especially – seems to be that once a customer passes a large order the bank should not touch the market concerned apart from to execute that order. That’s impossible – it amounts to telling one of the major liquidity providers in the FX market that they have to stop quoting and, more importantly, it suggests they have to stop dealing with other clients who may have urgent hedging needs.

This “stop everything else” approach just doesn’t work and the customers themselves know that. Customers like HP and Cairn Energy understand the issue of market impact, the discussions between them and the Barclays and HSBC respectively highlight this, therefore they understand the value of internalising flow and not leaking it to the market. HSBC did not “leak” and nor did Barclays – indeed one could argue that it was the customers themselves that created the problem by putting banks in competition.

Judge Breyer in the Bogucki case stresses that there are differences between that and the Johnson case, but the very fact that he referred to a case taking place on the other side of the US indicates what I sense is a growing distrust of the processes within the Department of Justice on the part of the judicial system. Put simply, a jury in New York might have bought the line that Cairn was an innocent victim, but the judges don’t seem to agree – they clearly understand that firms with multi-billion dollar businesses have professionals handling the risk associated with their operations.

This scepticism is apparent in Judge Breyer’s order dismissing the Bogucki case when he states, “A hypothetical is a thin reed indeed on which to hang criminal charges,” but that seems to be exactly what the US government is relying upon in most of these cases. 

I wrote recently that the DoJ could perhaps revisit its approach to these cases – a starting point would be credible “expert” witnesses who really understand the FX market (not just “markets”) because it is different. It can only be hoped that this run of cases being tossed extends to Mark Johnson. If and when that happens, perhaps the FX industry can settle down a little and return to doing what it does best – managing the risk of those firms that move funds across borders.

Certainly customers of all kinds should be confident that in the FX Global Code era they will be treated fairly, according to very public and transparent standards. The existence of the Code means that “I didn’t know” is no longer a credible excuse for any potential miscreant and there are firm guidelines as to how orders should be handled. 

That itself raises a thorny issue, however, for while banks have signed up to the Code in their masses and are obliged to ensure their staff are not put in harm’s way by stepping into grey areas when it comes to conduct, the take up by what appear to be unsophisticated players is very different.

I accept that HP and Cairn did not instigate these criminal cases (which is significant in itself I believe) but they did not stop them either. Both companies have shown themselves to have a good understanding of the FX market’s functions, but neither have, as far as I can tell, signed up to the Code.

Perhaps when all this dust settles we should be asking them the tricky question “why”? After all, the Code applies to the instigator of these big orders just as much as the counterparty to them.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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