The UK’s Investment Association (IA) has today published a number of guidelines regarding the use of last look, seeking to address concerns that this practice can negatively affect the ability of asset managers to meet the needs of their clients.
As part of the guidelines, the IA has also identified a number of instances in which last look should no longer be considered acceptable due to the potential for misuse of information by the liquidity provider.
These include: pre-hedging during the last look window, trading activity based on information derived from rejected trades and trading activity based on information from a request for quotation which is in progress or those that are not won.
Commenting on the report, Galina Dimitrova, director of investment and capital markets at IA, says: “Investors have long been concerned about the lack of transparency around last look. We want to ensure that the FX markets are fair and effective as this benefits investors by enabling asset managers to make efficient and productive investments on their behalf.”
Dimitrova adds: “Building on the best practice outlined by the FX Global Code of Conduct, our recommendations will provide asset managers with much-needed information on their trades so that they can fully understand the impact of last look on their business.”
The IA says that the industry’s call for improved transparency comes as a result from the current lack of clarity asset managers face when their trades have been declined as a result of the application of last look. The association says that firms often do not receive notification when their individual trades have been rejected and that they also do not get an explanation as to why last look has been applied, making it difficult to understand the impact on trade execution.
“The IA is therefore asking that liquidity providers publish a clear definition of last look and their procedures, as well as formally informing clients when last look has been applied,” says the association.
Under the IA’s new guidelines, liquidity providers should explain why the trade has been declined, drawing from a proposed standard set of reasons, including latency, price improvement, internal credit checks and price tolerances.
For those trades which are declined, the IA is also asking that liquidity providers offer time stamps accurate to the millisecond and other data disclosures. In the instance that a large trade is broken down into a series of small trades, the IA recommends that data is provided for each trade as, although overall performance may look good versus an expected benchmark, it may mask costs that are being missed on individual transactions.