Articles tagged by Pre-Hedging
So my sources tell me the “fatal flaw” draft of the Global Code of Conduct is now complete and that the work is nearing its completion – only of course it is not, for as was explicitly stated at the start of the effort, the Code will be a living breathing thing that will continue evolve over time.
Which is good because as I understand it, there are still contradictions within the text, not least around the subject of (deep breath) last look and pre-hedging.
If the feedback to Monday’s column is anything to go by, I can confirm that last look remains a highly emotive issue in the foreign exchange industry. It will help though, if not only some people “take a chill pill” to calm what is a highly emotive debate, but also if they read the Global Code properly and, more pertinently, understand that market making is not a charity and often the client’s own execution style can contribute to market impact.
LMAX Exchange has publicly committed to support the impending Global Code of Conduct in FX markets, however the operator has done so with a small caveat.
LMAX says it is “committed to serve as the industry’s best practice for transparency and fairness in FX execution and to lead, by example, the positive reforms aimed at restoring trust and integrity in the FX marketplace”.
It adds that it is from this stance that it is committing to the Code, “after we have been assured that the Code will be updated post- publication”.
I have been stating in recent months that one of the challenges for the FX industry will be promoting the “good news” story that it is reforming itself, while at the same time being on the end of negative headlines around actions that allegedly took place a decade ago.
This week’s headlines around HSBC and the alleged running of stop losses is a case in point, but the accusation from ECU Group against the bank also raises an early question about one of the Global Code of Conduct’s principles.
On the day that the second and final phase of the FX Global Code of Conduct was released, panellists at Forex Network New York debated whether it puts an unnecessary burden on buy side firms.
Philip Weisberg, a member of the Market Participants Group (MPG) that helped craft the Code, stated that it “puts an enormous responsibility on the buy side”.
Giving an example of this responsibility, he pointed to last look, a practice that some platforms do not allow and others allow to be implemented in a variety of ways. The platforms must disclose their last look policies, meaning that buy side firms need “to have some type of framework for evaluating the efficacy of a venue or liquidity provider choice or execution choice”, Weisberg explained.
We’re back on asymmetric response times because I have new data from another platform that highlights the absolute – and to me mystifying – divide in the industry over how much longer it takes to accept or reject a trade. I am really confused over how 16 LPs can take much longer to reject a trade than accept, while another 16 take longer to accept than reject. Someone out there must have a reasonable explanation but I’m blowed if I can come up with one.
There are, predictably, plenty of headlines about nervous foreign exchange traders in the wake of the Mark Johnson verdict, many of them are justified because it could have deep ramifications for the industry.
We need to see the details of the conviction, however – specifically, was it based upon a lack of honesty with the client or does it reflect the US legal system’s view that pre-hedging is front running? Without that vitally important detail, we can’t judge the impact.
Pre-hedging is a hot topic at the moment, not least because of the Mark Johnson trial and the possible ramifications of the jury’s guilty verdict, but what happens when pre-hedging goes wrong? This was one of several interesting questions raised during our Insights call on Thursday last week and is something I’d like to go into in more depth here. What do we do with price improvement as a result of pre-hedging, and more pertinently, what do we do with a loss?
I have long had a healthy distaste for certain phrases used in the foreign exchange industry, roll out a “client centric”, a “best of breed”, an “innovative” or even a “we are a disruptor” and my eyes start rolling and my attention wanders. These have, therefore, all been ruled out of the inaugural Irrational for Phrase of the Year, not least because they have been around for decades.
But while the winner of the Irrational has also been around for a while, as far as I can work it out it barely registered on the industry’s consciousness before 2016.
The Global Foreign Exchange Committee (GFXC) has issued a paper on the results of a survey it conducted with the intention of measuring the baseline level of awareness and adoption of the FX Global Code by market participants.
The survey was undertaken at the end of September 2017 and sent to more than 500 FX market participants globally, including firms not involved in the creation of the Code. The survey was conducted with the objective of gathering a diverse set of views from firms representing different jurisdictions, sectors, sizes and levels of activity in the FX market.
It wouldn’t be the modern day FX market if the year didn't kick off with legal issues and 2018 is no different. What is different this year is that they could, conceivably, pull the curtain down on a sorry saga and provide critical direction on two grey areas in the industry.
There have been regulatory fines handed down regarding last look but as far as I can tell a case currently being heard in London is the first where an employee is claiming they were dismissed largely because of their use of the practice.
I have been reading through the application for bail lodged by Mark Johnson’s lawyers following his conviction and sentence to two years’ jail and not only do I think it previews his full appeal, but while I understand the job of the counsel is to make the best case they can by stretching facts to the limit, my natural reaction has also been that something went badly wrong during the trial for the verdict to be delivered the way it was.
In my column of November 11, 2013, I argued FX “needs a hero” – leadership to counter the negative narrative that surrounded the industry. Thanks to those that delivered the Global Code, we received that leadership, but the work is not done - in fact it is now more needed than ever, so it's time for today's leaders to step up and explain why pre-hedging is important. Along the way it will help Mark Johnson, but equally as important, it will help the entire industry.
Next Tuesday sees Mark Johnson’s bail application heard in New York and the documents filed by prosecution and defence are available online, which gives the wider world an opportunity to study both sides of the case through one prism. I've taken a look at both documents and, as someone with more than 40 years experience in this industry, it concerns me that a central plank of the prosecution's case is backed up by an obvious and fundamental lack of understanding as to how the FX market handles large risk.
The Global Foreign Exchange Committee has named Simon Potter executive vice president of the Federal Reserve Bank of New York, as chair for a one-year term. At its meeting this week in Johannesburg, it also nominated and elected Adrian Boehler, global co-head of FXLM and commodity derivatives at BNP Paribas, and Akira Hoshino, senior fellow and managing director, head of global markets trading at MUFG Bank, to serve together as co-vice chairs for a two-year term.
Speaking to Profit & Loss after what Potter says was a very productive meeting, he is keen to stress the diversity and engagement represented by the GFXC.
In this column on June 7 2018 I wrote that the time had come for someone to show industry leadership when it comes to arguing the foreign exchange industry’s corner specifically around pre-hedging and Mark Johnson’s pending appeal. I looked particularly at the industry associations and, some believe, called them out on it. It is pleasing to see that there is a response from the industry, but it is not yet enough and more can be done - especially by one or two associations.
The Global Foreign Exchange Committee (GFXC) has added a negative example for Principle 11 of the FX Global Code – which deals with pre-hedging – to the document’s Annex. The update has been released alongside the minutes from the GFXC’s recent meeting in South Africa as well as a paper – The FX Global Code at One Year: A look Back and a Look Ahead – that summarises the achievements around the Global Code over the past year, but that also looks ahead to the work to be done.
In this week’s podcast Colin Lambert attempts to sound informative on all things crypto, while Galen Stops is informative on all things crypto. They also discuss the shift in FX trading from anonymous to disclosed channels and its impact on last look as well as the latest on pre-hedging from the Global FX Committee. There is also time for one to bang on about a correct prediction (to date) made at the start of the year and they also touch on "de-centralised" crypto trading platforms and realise it's just like the FX options market in the 1980s.
Benchmark fixes have been immersed in controversy for the past five years, but anecdotal evidence sees no shift in asset manager attitudes to them. Colin Lambert asks, will these firms ever desert the Fix?
If there has been one lightning rod for controversy in what has been a pretty turbulent period for the foreign exchange industry it has been benchmark fixes. Banks have been fined, traders and managers have been dismissed, and some are facing legal sanctions, including jail, thanks to various activities all of which were centred on the WM and European Central Bank fixes.
ACI – The Financial Markets Association (ACI FMA) has filed an Amicus Brief on behalf of former HSBC FX trading head Mark Johnson, who is appealing his conviction and sentencing earlier this year for several wire fraud offences.
In the Amicus ACI says that if the US government’s “Illogical” position is allowed to stand, and the conviction is not overturned, bank dealers are unlikely to operate in the face of potential criminal sanctions simply for transparently and fairly hedging the uncompensated risk of “colossal loss” to their shareholders.
A second Amicus Brief filed in the Mark Johnson appeal stresses the risks associated with providing FX services to clients around the Fix and argues that pre-hedging is intrinsic to handling orders at the mechanism.
The Amicus from Professor Torben Andersen, the Nathan S. and Mary P. Sharp Professor of Finance at the Kellogg School of Management at Northwestern University says that without the ability to pre-hedge, dealers would have no economic incentive to trade as principals with customers at the Fix.
“When dealers trade as principals at the Fix, they typically pre-hedge their trades by executing a number of smaller transactions before the Fix time,” the Amicus states.
And so, dear readers, we commence the second 500 of these columns by returning to a theme that has dominated the past 100 – and which remains the biggest single issue facing the foreign exchange industry at this time. I refer of course, ...
More than a few people have told me in recent weeks that they see the trial (which is now at the appeal stage) of Mark Johnson, and that of the Cartel threesome – which started this week in New York – as being inextricably linked. You all know what’s coming…I don't agree. In fact I would argue there are some fundamental differences that mean this week’s trial – complex as it is – cannot be seen through the same lens.
On Monday I called for a radical re-think around the FX industry’s use of benchmarks – and this elicited (and continues to do so) considerable feedback. Re-reading the latest class action over activities around fixes, however, made me realise this case could also end up revolving around pre-hedging – and if it does, then not only do certain industry bodies face a real challenge, but more broadly we have to discuss much more than restructuring one small piece of the market.
The FX industry is advancing how it deals with certain issues, but the pipeline of areas in need of clarification and further debate shows little sign of slowing down. Two areas that concern me at the moment are exactly how platform operators are enforcing their rulebooks - are they being fair and balanced to both LPs and LCs? - and exactly what constitutes "full amount" trading? An open and data-backed discussion will solve the latter, but I wonder if we need an industry ombudsman for the former?