I’ll keep this short as it’s a public holiday in my domicile, so I will just ask the question, how worried should the FX industry be about ESMA’s pondering over including spot FX in its Market Abuse Regulation?
Obviously the question has been raised with the European regulator thanks to the ongoing headlines around the eternal legal actions surrounding market manipulation claims, but is it necessary? Those acts that are now seen as unacceptable took place several years ago (almost a decade in some instances) and the foreign exchange industry has responded with the development of the FX Global Code (which, to be fair, ESMA does acknowledge in its Consultation Paper).
In some ways ESMA’s musings could be a look into the future for the FX industry if it fails to properly adopt and adhere to the Code, for this would be much more stringent regulation with more onerous reporting rules and many more questions over market activity that is perfectly acceptable, but that looks strange to a regulator used to dealing in listed markets. Of course, it could also be that the sheer scale of the spot FX market could thwart any ambitions European regulators may have of incorporating it into MAR – after all regulation is meant to protect the end investor which should theoretically mean that allFX transactions have to be reported and analysed, including those at the airport (which would make life fun for anyone responsible for understanding what the day’s high/low was!)
A side issue could be financial institutions recoiling from such a move by shifting all their FX operations out of the European Union into…errr…the UK? As if life wasn’t chaotic enough!
To me the sensible solution for ESMA is to take a leaf out of the Australian and UK regulators’ book and adopt the FX Global Code – with the one caveat that it really needs to sort out last look, the Code deals with market abuse issues comprehensively, so why not, if you are ESMA, publicly and formally state that this will be the criteria you will use to judge conduct and activities in FX? That way everyone knows what the guidelines are and what is acceptable or otherwise and if you are ESMA probably the simple solution is to start any investigation you have by looking at firms that have not signed (and publicly posted) a Statement of Commitment.
On which note, to end with a digression, sources in the know tell me that I was wrong in stating on a panel session recently that there were five members of the New York Foreign Exchange Committee who had not signed a Statement of Commitment to the Code, contrary to what the common understanding is of the membership rules of that committee. Apparently they have, it’s just they haven’t posted them anywhere – to which my (obvious) question is, why? What value is there is having signed a Statement and then not letting anyone know? I thought this world was meant to be about transparency of action – how transparent is that?
It is silly side issues like this that make me despair sometimes – there is nothing to be scared of in stating publicly you adhere to a commonly agreed set of principles, so why not do it? Ridiculous aspects of our business like this make you start to understand a little why regulators like ESMA decide they want a closer look at FX. That should not be welcome by any participant, so why not do something to avert it?