I have been keen in the past (appropriately so I still believe) to argue that the FX industry could do much more to help Mark Johnson fight his case and appeal against conviction for misconduct. The judges are apparently now considering whether striking down the conviction would mean a return to the “wild west” in FX markets among other matters and this merely serves to highlight what I meant. The FX Global Code was put in place to ensure there was no “wild west” – at least in institutional markets, but did we, as an industry, make that obvious enough?
As I wrote the week before last in this column there are many more important considerations to be taken into account that the outside risk of an industry returning to standards (that were practiced by only a few) that are now no longer accepted – the judge only need look at the FX Global Code and the number of sell side institutions that have signed a Statement of Commitment to see that.
Rather than repeat my perception of the weaknesses of the US government’s case – and they are many – perhaps we ought to return to one of the crucial factors in this whole sorry mess. What would have happened had HSBC followed strict instructions and bought GBP 2.25 billion in one minute? Of course, as any FX pro could tell you, the chances of actually buying that amount in one minute – which is exactly what would have to have been done if the Fix protocol was strictly adhered to – is minimal. The only upshot would have been FX would not have had to wait until October 2016 for its first real flash crash. I shudder to think where the market would have ended up, but I am guessing had the bank continued blindly to try to buy the sterling in a minute Cairn Energy would not have been paying away a few pips in P&L thanks to pre-hedging, it would have been paying hundreds of points in slippage – and at $22.5 million per 100 points that’s quite lumpy.
There was no “fraud” involved here, yes there was the use of what looks at face value to be incriminating language, especially with the “Christmas” comment, but that was probably the result of HSBC getting the deal on the basis of the least possible risk. There was no price to make in two and a quarter yards, there was no real risk to assume, beyond the pre-hedging amounts involved (and we should not forget that this could have gone wrong), the bank merely had to execute in a responsible fashion to minimise the client’s market risk. To me, that last line is crucial, it was about minimising the client’s market risk. Had the whole order been bought in one minute (or even five), the client would have had a very tough lesson in both execution and market risk.
HSBC, under Mark Johnson’s direction as head of cash trading, executed the Cairn order in the correct fashion given the circumstances that it was to be done at a one minute Fix. Pre-hedging was the only real option here, as the prosecution seemed to accept at the first appeal stage, if it were to avoid a market dislocation.
So, with respect, there is no question of a “return to the Wild West” in FX markets as a result of this decision – the industry has already acted to prevent that as much as possible. There should also be no question of Mark Johnson’s innocence.