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Australian Banks Admit Conduct Oversight Failure in FX Businesses

Two Australian banks, National Australia Bank and
Commonwealth Bank of Australia, have each made a “benefit payment” of AUD 2.5
million after the local
regulator, the Australian Securities and Investment Commission (ASIC) found they had inadequate controls to address risks relating to
instances of inappropriate conduct in their offshore FX businesses.

ASIC says
it identified attempts to manipulate FX fixes, front running and the
inappropriate sharing of information by traders at CBA and NAB between 1
January 2008 and 30 June 2013.

It says
that on several occasions, a NAB employee on an offshore spot FX desk, acting
together with an employee of another unidentified Australian bank, shared
confidential information and entered offers into a trading platform without any
apparent legitimate commercial reason for placing the offers. ASIC adds that on
a number of occasions, NAB employees also disclosed specific confidential
details of pending client orders to external market participants, including
identification of the client through the use of code names and inappropriately
exchanged confidential and potentially material information about the bank’s
client flow or proprietary positions.

regulators also says that on two occasions, CBA employees on an offshore spot
FX desk acquired proprietary positions in a currency after coming into
possession of knowledge of large CBA fix orders in that currency. They also traded
in a manner that may have been intended to cause the trigger price for a stop
loss order to trade when it might not have traded at that time. ASIC adds that on
a number of occasions, CBA employees on an offshore spot FX desk disclosed
confidential details of pending client orders to external third parties,
including identification of the client through the use of code names.

ASIC says
it is concerned that the two banks did not ensure that their systems, controls
and supervision were adequate to prevent, detect and respond to such conduct,
which had the potential to undermine confidence in the proper functioning of
the market.

Under the Enforcement
Undertaking (EU) issued by ASIC, NAB will develop a programme of changes to its
existing systems, controls, monitoring and supervision of employees within its
foreign exchange business to prevent, detect and respond to, amongst others;
attempts to manipulate the market for a currency, including by placing offers
without a legitimate commercial reason and attempts to influence benchmark
rates; inappropriate trading while in possession of confidential and
potentially material information; and disclosures of client confidential

the bank will also develop a programme of changes to its existing systems,
controls, monitoring and supervision relating to the management of fix orders,
management of stop loss orders, and external communications containing specific
confidential information to address such conduct.

ASIC says
that the programme will incorporate changes already made by CBA as part of an
existing review of its global FX business.

implementation of the programmes, both banks will provide an annual attestation
from senior executives (executive in CBA’s case) that the systems and controls
in their spot FX businesses are “appropriate and adequate to effectively manage
specified conduct risks”.

ASIC commissioner
Cathie Armour, says, “A well-functioning foreign exchange market depends on all
participants acting with integrity and fairness. ASIC is committed to ensuring
that major financial institutions have in place effective mechanisms for
ensuring that their employees are trained, monitored and supervised to provide
financial services efficiently, honestly and fairly.”

ASIC adds
that it encourages market participants to adhere to high standards of market
practice, including those set out in the Global Code of Conduct for the Foreign
Exchange Market, published by the Bank of International Settlements.

In a
statement, NAB group chief risk officer, David Gall says NAB has fully cooperated
with ASIC in resolving this matter.

“We take
our role in upholding high standards of professional conduct seriously,” he
adds. “Core to our values and commitment to customers and the community is
doing the right thing. However, we acknowledge that in some instances within
our Spot FX business we could have better trained our people and had more
appropriate systems and processes in place.

“The trust
of our global spot FX clients, the majority of which are institutional
investors, is crucial and it is a priority to improve our controls and risk
management systems so that they can have confidence in doing business with us,”
he continues. “While Australian banks are small players in the global spot FX
market, we strongly support a well-functioning and fair global FX market and
will ensure the changes we make under this enforceable undertaking align with
the recommendations made in the Global FX Code of Conduct being developed by
the Bank for International Settlements.”

In a
statement, CBA says, “The enforceable undertaking includes the engagement of an
independent expert, who will review and assess the changes we have made to our
trading operating model in recent years, including in training, procedures and



Colin Lambert

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