The failure of banks to effectively monitor human communications around FX trading is having far-reaching consequences for the industry, according to market experts.
In a webinar earlier this week, “The FX Crisis: Dealing with Human Risk and Restoring Trust within the FX Market”, speakers outlined how it was this failure that was largely responsible for the record $3.4 billion in fines against the big banks in FX, and said that these firms are being forced to fundamentally rethink how they view and manage human risk exposure.
“I think that the industry as a whole has had a huge wake up call,” said Rebecca Healey, principal at Tabb Group.
During the discussion Matthew Kulkin, a senior associate at Squire Patton Boggs, highlighted the economic costs of failing to effectively monitor human risk in FX.
“When the regulators brought their settlements, not only did they bring monetary fines against the banks for either manipulation, attempted manipulation, or aiding and abetting, but it was also because they had inadequate oversight of the chat rooms and electronic messaging that was being used between the banks,” he said.
Stephen Epstein, vice president of product marketing at Digital Reasoning, added that despite the financial consequences of failing to properly monitor these conversations the banks are more driven by their desire to reduce risk than meet regulatory demands.
“Walking through these banks I really assumed that they were going to be talking about regulations and meeting the new requirements that are going to come down the line, but instead they were talking about operational risk and reputational risk. What was really important to them was making sure that their business, their franchise, was protected and that their employees that add great value to their business are protected, while the ones that really expose their business are called out very quickly. It seems that banks really want to get ahead of this human risk issue,” he said.
Healey emphasised the importance of using technology to help reduce this human risk exposure, adding that banks have made improvements in this area.
“Firms are getting so much better at using technology in order to manage risk internally and run risk profiles. It’s about engaging technology in a different manner and using it to your advantage, making sure that the systems and processes are much more robust,” she said.
Healey also predicted broader changes to the FX marketplace as a whole following the allegations of market manipulation. “I would say that the OTC market as it stands in Europe will be no more. As much of it that can go on exchange, will go on exchange,” she said.
A full recording of the webinar can be found here.
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