It would be remiss of me, after so noisily calling for the FX industry to do more to support Mark Johnson’s application to the US Supreme Court for a hearing, not to congratulate ACI – The Financial Markets Association, and in particular the US chapter of said association, for its work in delivering a second Amicus Curiae in support of Johnson’s case. One can only wonder what could have happened if more industry associations had taken the decision to support the case instead of conveniently turning a blind eye while their institutional members cravenly rolled over and admitted guilt to retro-fitted charges and paid fines to make the whole business go away.
Many in those institutions think, of course, that the whole business has gone away, but for Mark Johnson it certainly hasn’t, and nor has it for the industry, for whom the challenges remain – not least that the case is still very much about pre-hedging and client communications. The fact that we are talking an appeal to the Supreme Court doesn’t change anything.
Lest we forget, in spite of the prosecution alleging, retracting and then making new allegations as the trial and appeal progressed, the original conviction was, in the eye of many expert observers of the FX market, plainly wrong. It could be argued, especially reading the Amicus from the New York Council of Defense Lawyers, that Johnson was very unlucky in where and how his case was processed. From a jury that clearly did not understand the nuances of the FX market (and why should they?), he then, according to the NYCDL, had to face an Appeals Court that repeatedly takes an aggressive view over a particular point of US law – a view that other courts apparently do not share.
It is to be hoped that the Supreme Court will listen to the case, and that it will allow an explanation of why there was nothing wrong with how the trade was handled. If that happens then the pressure will be on the appellate team to do a better job of explaining how things work to a US legal system steeped in the open exchange market structure.
The fact of the matter is, the way that HSBC handled the Cairn order was little, if any, different to how it would be handled today. The only difference, thanks to the conviction of Johnson, is that the bank will come to the original negotiations with the client supported by an army of lawyers and the contracts will be ever more complex – to the detriment, and cost, of said client.
There is a fundamental point that the judge, jury and appeal court appear to have missed, or ignored, and that is the physical impossibility of transacting that amount of sterling in one minute. I still do not understand why the original defence did not labour this point because for all the legalese involved, the jury was convinced that what went on was front-running – and it is that jury’s decision that has to be overturned.
Whichever way you look at it, buying over two billion pounds in a minute is impossible, even buying it in 10 minutes is likely to create a flash move – and that is where there may be an opportunity if the case gets to the Supreme Court. It is perhaps fortunate that while the legal profession and world at large doesn’t understand the nuances of different market structures, they are all very well aware of what a flash crash is. I know I have a simplistic view of this but sometimes that is the best way – show (perhaps using modern pre-trade TCA analytical techniques) exactly what happens in such a scenario, stick a dollar number on it in terms of how much it would have cost Cairn, and, hopefully, get the right decision – a reversal and acquittal.
The ACI Amicus raises some interesting points in terms of the potential impact on the US FX market, some of which were raised in a previous Amicus from Professor Torben Andersen from the Kellogg School of Management at Northwestern University ahead of the original appeal. The US clearly seems to be losing ground in terms of its market share, and while this cannot entirely be put down to the conviction of one man, it is not irrelevant either.
Senior figures involved with the FX Global Code have previously told me that they feel a negative outcome from this case in terms of the use of pre-hedging and other activities that may come onto the DoJ’s radar will merely result in a bifurcated FX market. We have seen this before, when Dodd-Frank regulation seemed too much for certain non-US counterparties and we will, in my view see it again. The fact is, as observed most perceptively by the ACI filing, people are nervous dealing with anything involving the US – that uncertainty is inevitable when one jurisdiction establishes that practices that are seen as OK (subject to the appropriate transparency) elsewhere, are suddenly, and retroactively, criminal in that country. If I were trading or responsible for client orders, I would be very nervous given the recent price action ahead of some month-end fixings, and I am sure I would not be alone. If a US client was involved, or, apparently if it involved the US dollar (which is one side of about 88% of transactions done of course) then I am very nervous transiting through the US or having anything to do with that centre.
Whichever way we look at it, Mark Johnson should not be facing jail time or even conviction. The original jury was convinced he condoned front-running activity and only after that body of people had delivered its verdict and it was appealed, did the prosecution accept that pre-hedging was, actually, acceptable and change its tack. That the entire conviction was pretty much based around this misconception means it should be thrown out, but if it isn’t, then surely the rest of the FX world will look at this and put in place protections for both its staff and the broader institution.
Those protections will inevitably mean US-related entities jumping through more hoops, thus making their access to the market harder. And if you want a worse-case scenario, this all ends up with US industry ostracised from the global FX market. Clearly there is a mood of nationalism in the US at the moment, but its economy really does not want to be ring-fenced from global financial markets at this, or any other time.