If everything stacks up, something happened on Monday that highlights just how much more work the FX industry has remaining to not only get people to understand the FX Global Code’s requirements, but also to adhere with it.
Bloomberg News issued a report which basically stated that someone in Asia had triggered an option barrier in USD/CAD. In a copy of the report sent to me by two sources, the story talks of USD/CAD short covering “by options desks who had earlier sold large amounts of spot to trigger a break of the 1.3700 barrier”.
Now it could be that the headline, “USD/CAD Pares Losses After Breaking Options Barrier, Trader Says” is misleading and the trader was merely talking about the level as a technical support, but in all probability it we are being told about the deliberate targeting of a barrier option. The article cites the information coming from “an FX trader familiar with the transactions who asked not to be identified because the person isn’t authorised to speak publicly”.
I totally understand sources wanting to remain in the background – it is a staple of my business that the really interesting information almost always comes on background because it cannot be sanitised by various press teams – but I sincerely hope this FX trader has raised concerns internally as well as speaking to a news outlet.
A basic tenet of the Code is “if you see something, say something”, claiming ignorance of malpractice is no longer a valid excuse and triggering barriers? Well that’s right up there with the most obvious of wrongdoing. A staple of the Code is the requirement to act “fairly” when dealing with other market participants, there is also the small matter of Principle 12, which states, “Market Participants should not request transactions, create orders, or provide prices with the intent of disrupting market functioning or hindering the price discovery process.”
Aside from observing that Principle 10 could be made even more explicit on this issue by adding the triggering of a barrier to the guidance around handling stop loss orders (an example is provided in the annex for P12), what really concerns me is someone being so willing to discuss such an obvious breach of the Code’s principles in such a matter of fact manner. It is likely that the trader concerned works for an institution that has signed up to the Code – take up generally in Asia has been good – so at the same time one has to question whether the institution’s training programme is up to scratch?
Of course, it could be that the trader concerned is talking up the information a little and is actually quoting a rumour and had no familiarity with the trades at all. Equally, as I noted earlier, there may not have been a 1.3700 barrier at all, the rumour mill in FX markets, especially in Asia it has to be said, has not always been completely accurate and there are times when salespeople in particular, desperate to have a reason to call a client, lean too heavily on it.
Either way though, we should be concerned that the conduct referred to in this instance is even thought to have taken place. I am not so naïve as to believe that we will stamp out all misconduct in FX markets, there are too many firms operating in them that have no interest is signing up to and adhering to the Code, but I remain hopeful that the most glaring examples of misconduct are rooted out and dealt with.
It will be interesting to see what, if anything, comes of this report, for if there was indeed a barrier out there then it is most likely that a bank was holding it and management will know about it. At the very least it should warrant increased scrutiny, more probably a full investigation on the part of any institution with such a trade on the books. It could be the trader is a whistleblower and has already reported what happened to their institution’s oversight function and these steps are taking place.
It is important that something is known to be done about this, however, because the bank-client trust factor has returned to FX markets generally speaking, but it remains fragile, and events like this will only have cause to undermine it again. It would also be good to know that institutions take their adherence to the Code seriously and act according to its principles and come down hard on breaches.
There is one other factor in play of course, and that is a party to the trade used another institution to trigger the barrier – if that happened then the communications between those two parties, and the information shared therein, will be crucially important to those investigating the event.
So a lot can happen following what was a brief report on a newswire, but if nothing else occurs, if I were a client that had a 1.3700 barrier in USD/CAD that got knocked out on Monday, I’d be asking questions of anyone willing to listen, including regulators.