So we brace ourselves, as an industry, for more bad headlines about conduct in the FX markets, however in contrast to previous instances, the industry should be ready on this occasion. The culmination of the European Union’s clearly exhaustive and complicated investigation into events that first came to light six years ago is upon us and, according to sources in the industry, will result in yet another round of regulatory fines.
Talking to people at the tail end of last week about this when the rumours first emerged there seemed an acceptance that the banks will take the same path of least resistance that they did in the US and UK and pay up. Not only would this mean a 10% discount on the fine but it would also mean that the intricate details of the investigation would not be published, thereby, one source argued, making it harder for the prosecution in the civil case going through the European courts against a group of banks to gather ammunition.
Aside from being a little surprised that the details of a regulatory investigation can be kept under wraps after settlement, there seems little new in this issue. How can a bank, having accepted a fine from two other major jurisdictions, suddenly decide to fight one in a third? Especially when they are willing proponents of the globalised world and a similar business model?
The position of Credit Suisse is an interesting one, for the bank has yet to accept liability elsewhere, and this, apparently, held up the EU investigation. The bank says it could not find any hard evidence of misconduct in its investigations and as such will not roll over – certainly one has to feel it would have been heartened by the acquittal of the Cartel Three in New York.
It is hard not to see the banks as between a rock and a hard place on this, however. They know that acceptance of the fine indicates in most eyes an admission of guilt (even if they “neither admit nor deny the charges” in standard settlement language) and this will in turn feed the civil lawsuits announced last year against them in Europe and the US.
Given we know what is coming, the important aspect for me is less the approach of the banks, rather it about that of market bodies, particularly the trade associations meant to support and lobby for the industry. I understand that these bodies cannot comment on the details of specific cases, but I sincerely hope that when these fines are finally announced, they are out there in public stressing the reform work the FX industry has put in during the intervening period.
I am talking, of course, largely about the FX Global Code, but the work put in by banks to increase surveillance of the trading and sales teams should not be ignored – and nor should the acceptance on the part of a new generation of workers in the industry of a new, fairer and more positive, culture.
There are some in the industry, largely on the buy side and lower echelons of the LP world, who are less than enthusiastic about the FX Global Code – that is their right – but one real benefit of the Code and its creation in the wake of these allegations is that it is an example of an industry that knows standards had dropped and one that has done something about it. The wider world, with its short attention span in whatever happens to be in the news cycle, needs to know this.
It is not only about the non-financial public, however. I feel that bank boards also need to know this. They are unlikely to closely understand what is going on, they will merely see themselves having to sign off on another large cheque relating to misconduct in its FX division. The word needs to filter upstairs as well that, yes, these things happened and the industry dropped its guard and standards, but since then it has, and continues to work hard, to ensure that it doesn’t happen again.
It is also to be hoped that this latest round of fines, and the subsequent civil suit(s) does not provide yet more ammunition for certain members of the buy side to continue to ignore the Code as a “sell side solution for the sell side industry” as one put it to me late last year. The benchmark fiasco happened because dealers were put in an insidious position thanks to the banks’ collective over-eagerness to provide the customer with everything they could wish – including mid-market execution with no fee and no risk.
I agree that this is not a customer issue per se, but, as an example, last look is a direct response to not only latency arbitrageurs but also certain clients who were keen to “machine gun” the markets. My point is the FX Global Code is about more than benchmark manipulation and the buy side needs to recognise that – as does the wider world. Too many buy siders tell me they Code is “largely irrelevant” to them, but to me the important issue is that parts of it are relevant – in some cases around disruptive trading and business governance highly relevant.
So while we strap in for the next round of headlines, the FX industry has the fortunate advantage of not only knowing they are coming, but it has a relevant and solid example of what it has done to reform itself. Rather than wallow in self pity or do nothing perhaps, for once, it should get on the front foot and make this reform more widely known?