The Australian Securities and Investment Commission (ASIC) has published a review of its investigation into practices in the wholesale FX market and says that while it has identified conduct and process improvements in banks’ FX businesses, there remain a number of areas in need of further improvement.
Specifically, ASIC says that more can be done at certain firms in the areas of governance and supervision; mark ups; last look; the handling of confidential information; surveillance and monitoring; and staff training. The latest report offers examples of good and poor practices observed by ASIC as part of its regular oversight of the banks, and the regulator highlights that not all are universal, they are merely instances observed at individual institutions.
Of some concern, ASIC says it still finds banks that have no conduct risk assessment undertaken on the FX business to proactively manage conduct risk and compliance obligations. Others have compliance and audit functions that are not effectively engaged in oversight, control framework design, review and assurance and the monitoring and surveillance function undertaken by the front office has limited independent oversight and challenge.
On mark-ups the regulator says some firms still had opaque and inconsistent mark-up practices applying to clients, as well as ad hoc and manual monitoring of a sample of mark-ups within which automated trade surveillance systems had no capability to identify inconsistent and unexplained mark-ups.
As the Global FX Committee continues its work to strengthen disclosures via the FX Global Code, ASIC says that some firms’ disclosure of last look practices to clients was “difficult to access, complex and legalistic”. It adds that trade rejections were sometimes limited to circumstances that benefited the participant not the client and there were long hold times before a client was informed of a trade rejection. On last look, ASIC did also note that some firms had symmetrical logic behind their last look process and made trade rejection statistics available to clients.
One of the early “wins” for the FX Global Code was around the handling of confidential information and, perhaps thanks to ASIC fining five Australian banks in 2016-17 for conduct in this area, its review finds only that some banks had their sales and trading staff sitting in such close proximity that they can view one another’s screens and overhear telephone conversations, and also that some permitted use of personal mobile phones on the trading floor without appropriate surveillance controls.
Although surveillance had generally improved, ASIC still found firms at which there was uncertainty about ownership and accountability of monitoring and surveillance and some communication channels not recorded, monitored or retained for a suitable period. Suggesting that banks had more work to do on their surveillance mechanism, the report notes that there were “large volumes” of false alerts and that some had underdeveloped trade surveillance systems and their manual voice surveillance had small sample sets and were not risk based.
On staff training, ASIC found that some firms had “limited” FX market-specific conduct training for staff and that this was not refreshed for extended periods. It also noted that some firms had no monitoring or oversight of staff trading and their staff trading policies that were “vague or ambiguous as to what products could be traded, by whom, and as to holding timeframes”.
Cathie Armour, ASIC’s commissioner, says, “As a market and conduct regulator, ASIC has been enhancing our oversight of FICC markets, and been very active in our surveillance and enforcement of conduct in the FX market. We are pleased to see widespread adoption of the FX Global Code but there are still areas for improvement.”
The banks reviewed by the regulator were ANZ, Citi, Commonwealth Bank of Australia, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Macquarie, National Australia Bank, Royal Bank of Canada, UBS and Westpac.