Last week the Mark Johnson case took its latest turn with the filing of a Writ of Certiorari, which effectively asks the US Supreme Court to listen to an appeal against the judgement. This may be the last step along a long and painful road for Johnson, his family and friends, and, indeed, the foreign exchange industry – for it cannot be forgotten that some sort of precedence is probably being established here. This means that once again, and in some cases for the first time, we should hope that those bodies who purport to represent the FX industry seek to actual do something about matters, rather than wring their hands in private and make what they think are the right noises.
My understanding is that to support this latest step, third parties are able to file an Amicus Brief, such as those filed at the first appeal stage by ACI – The Financial Markets Association and Professor Torben Andersen, the Nathan S. and Mary P. Sharp Professor of Finance at the Kellogg School of Management at Northwestern University. To me, those documents highlighted a problem for the US market if the conviction is upheld, namely that banks handling orders that are in any way associated with the US (using the tenuous means that have been employed previously by the Department of Justice in this and other cases) will no longer pre-hedge and will, probably, seek to avoid trading in the US, or with US counterparts as often as possible.
The outcomes in either of those instances are pretty stark – imagine, for example (and I have used this argument again and again in this case) having to buy a few billion dollars in the Fix? Put aside my arguments that first the one minute and now the five minute window are inadequate and just focus on what happens without the pre-hedging. What we saw in April when EUR/USD, the most liquid market in the world probably, moved 43 pips in the five-minute window will be nothing compared to what could happen. And let’s not forget there was also pre-hedging of that April Fix, so without that the impact would have been even worse.
It will be interesting to see the reaction of the first US treasurer seeking to hedge a large offshore exposure when, executed according to the rules, that hedge sees slippage of 100 pips or more. On the Cairn deal alone that’s a cheeky $23 million dollar cost and anyone who has actually worked in FX markets will tell you that’s probably an optimistic outcome.
The latest writ argues that the Johnson case typifies a “growing trend” in which the US government interferes with the private affairs of sophisticated business people and that he faces jail for conduct “that would not even support civil liability”.
If that is indeed the case then surely now is the time for the FX industry more generally to get involved? A member of our industry is facing jail over an action with which the customer itself did not see any problem, it is a prosecution brought by people with a very sketchy knowledge of how the FX market works. This means that these associations, some of whom are paid a lot of money by their institutional members to lobby on their behalf, need to help raise that awareness and understanding. For if this is not an occasion when that is needed, I don’t know when is.
As an example, how many institutions are able to produce execution analysis highlighting the need for pre-hedging (or rather, in my opinion, the need for a longer execution window)? A lot, is the answer, and while those firms cannot collate and aggregate information, their representative bodies surely can?
There is, without doubt, a tendency by the US authorities to retro-fit behaviours that at the time were standard industry practice. I mentioned in Thursday’s column that I addressed a private forum last week on conduct. One of the questions I asked was, “what behaviour of today will be viewed very differently through the prism of 2025?”
This is a challenge facing those responsible for maintaining the FX Global Code, but it is also a challenge for every individual and institution and therefore it should also be a real concern of those bodies paid by these institutions to protect and promote their interests. To me, the way to start meeting that challenge is to establish now, once and for all, why Mark Johnson should not be going to jail and why the creep of the US authorities into the functioning of a global market is unwarranted and being pushed too far. The conviction risks bifurcating the FX market along US/rest of the world lines, much as the initial attempts to regulate the swaps market did in the wake of the GFC. Personally, as someone who doesn’t work in the US market I could care less, but I have friends and acquaintances who do work there and they deserve to be protected from what could be a serious fallout.
Occasionally people tell me that my predictions are far-fetched and won’t come true. Maybe, but look at how seriously banks in particular are when it comes to conduct risks. Indeed there is an example involving the Fix, for my understanding is, talking to banks about the issue, the legal and compliance teams are reluctant to allow anyone to sit on an informal advisory group to discuss all matters Fix. It is not that big a leap to a world in which customers, especially US-domiciled, find the lengths to which their banks will go to help them with the hedging requirements are much less than they are for clients located elsewhere.
And again, if you want in indication of this, just look at how more and more banks are, anecdotally at least, declining to leave any customer orders with their principal desks. Even though there are occasions when this desk may do a better job in terms of holding a client in a stop loss, for example, the orders are routed through the agency algo teams, who execute according to the book and “I am very sorry, I know we hit the bottom of the day but the algo was triggered and has no discretion”. The banks are doing this because they are highly aware of the legal risk involved in orders thanks to the Johnson case in particular.
So, there is one last chance for the FX industry to educate the US justice system about how it operates on a global basis and raise awareness and understanding of how sometimes doing the best thing for the client can be counter-intuitive to those steeped in equity or futures markets processes. The window is not long as I understand it, but the opportunity to submit to this process still exists, and I, for one, will be very interested in who actually steps up to support the interests of the FX industry.