This is a tricky one is some sense – it always is when you target a hugely respected institution – but I have to ask, why did the Bank of England decide to tag on a warning about FX markets to its report into the misuse of its video and audio feeds?
Now it has to be stressed that the Bank led with a mea culpa in saying that it should have picked up on the issue earlier and reacted differently and I think most people will agree that was the appropriate response. It clearly failed to keep up with the risks associated with technology (not that audio and video feeds are ‘new’ technology), and, according to the report, it didn’t realise the third party it contracted to manage the video and audio feeds was “mis-using” them (whether it was or not can only be discerned by studying the legal contract).
That said, it did come as a surprise to me to read, after the key findings of the investigation, in a section entitled “Concluding Observations”, that the incident “raises questions about the current scope of the regulatory regime”.
The report then went on to observe that the UK’s Fair and Effective Market Review in 2014, made 21 recommendations designed to ensure that FICC markets were just that – fair and effective – and highlighted FX as a market in need of remediation. Of course, FX markets needed a reminder of conduct in 2014-15 and as the Old Lady notes, the FX Global Code has provided a great deal of help in this area.
It adds, though, “Whilst the FX Global Code is not binding, it has improved behaviour and can be considered when assessing senior managers’ behaviour under the Senior Managers Certification Regime. At an international level, the Bank has already reached out to colleagues across other central banks, and put them on notice of this risk of misuse of audio access.
“We have also reminded market participants of their obligations under the FX Global Code and UK Money Markets Code (including at the official market-wide committees) and, in particular, the overarching obligation under the Codes to behave in an ethical manner to promote the fairness and integrity of the markets.
“One recommendation relating to the FX markets arising out of FEMR (recommendation 3b, to create a new statutory civil and criminal market abuse regime for spot foreign exchange, drawing on, among other things, work on a global code) was not enacted. There is a question as to whether the decision not to take this recommendation forward merits reconsideration. HM Treasury may, therefore, want to consider whether an extension of the regime is desirable when an appropriate opportunity arises.”
I am fascinated as to why the Bank chose to single out FX. I absolutely understand that many FX traders would have taken up the offer of a faster feed, but surely interest rate traders would have benefited from the information just as much? Maybe even more given the lack of interest rate impact on exchange rates in the current economic climate?
I think we should be clear here, this was a failing by the Bank of England, not the FX market. I don’t know the actual numbers but let’s assume that the audio feed was coming in with a delay of two seconds and the video of six. The fact of the matter is, whoever was receiving the information via the audio feed was still getting it at an appropriate time after the announcement was made (and if journalists are given the information under strict embargo even the audio feed is late with the news).
This loophole did not allow anyone to front run markets, just to react quicker – which begs the question, should we ban microwave towers? After all, spending money on an audio feed to gain a time advantage over trading rivals is no different to spending money to build a microwave tower to get price updates quicker. The fact is, spending money on technology creates an advantage for traders in financial markets.
I should be clear here by stating I have no problem with criminalising certain behaviours (as long as it is very clear what can and cannot be done), but I just wonder why the Bank of England chose to highlight FX markets in this fashion? It feels like a last-minute addition to the statement and I can’t help but think of the classic diversion strategy in that what was said was (with capitals to reflect the fact I can’t shout in these pages!) “we know we did wrong and we have rectified matters but LOOK OVER THERE, LOOK OVER THERE!”