The Code and the Individual

Although most of the attention is on institutional adherence to the Code of Conduct, Colin Lambert suggests there is
also a great deal that individual employees need to know.


It was one of the first challenges identified by those creating
the FX Code of Conduct – how do we get the message out
there? It is not just about ensuring that all firms that operate
in the foreign exchange industry understand their
responsibilities under the Code – individuals too have
responsibility.

It was notable, talking to people this time last year, how few
were concerned about the Code’s impact upon them. Generally
speaking, the prevailing attitude was summed up by an
attendee at Forex Network New York, who noted, “The Code will
be what it will be. I’ll just wait for it to come out and have my
compliance department tell me what I can and can’t do.”

While most people stress they are keen to “do the right
thing” as one puts it, few appear willing to be proactive in their
adherence. Partly this is because of pressures of work and
other tasks, and partly it is because the individual firms have
yet to explicitly state how they expect staff to adhere.

The latter seems a disingenuous rationale, however, for
surely a starting point should be – for the individual – reading
and understanding the Code? “I do enough compliance
training, why would I want to do more?” asks one banker. “I’m
pretty confident the rules and principles I have to adhere to
internally are a lot stronger than those in the Code.”

That is as may be, but if there is one advantage in having the
Code it is that everyone should be on the same page when it
comes to conduct. Yes, certain institutions may have stricter
interpretations of certain aspects of the business, but a single
point of reference would appear to be very valuable for an
individual. There is also the question of portability – if an
individual can demonstrate they are on top of the Code’s
demands and requirements, surely that would make them
more attractive to a prospective employer?

This could be important in the 12 months following the May
25 release of the Code, for as reported in this issue, the BIS
Working Group has been informed by market participants that
it may take up to that time to be ready to sign the Statement of
Commitment at the back of the document. If an individual
wants to move in that time, especially from an institution that
has not committed to one that has, they could be at a
disadvantage compared to some of their peers who may be
chasing the same role. “I would certainly envisage job
candidates being tested on the Global Code, we test them on
everything else nowadays,” says a senior e-FX manager in Asia.
“Although it will be another test, it will be important, because if
that employee blows up and transgresses, we have to be able
to demonstrate that we asked the right questions at interview.”

The e-FX manager points to the saga of the Cartel chat room
as the reason for such an approach. “Some members of the
Cartel moved around and the institution they went to got
caught up in the scandal even though they were perhaps not
initially involved. In the context of a post-Code world, why
wouldn’t you test future employees on the contents?”

Beyond the Box Ticking

There will undoubtedly be a push from third parties to
provide the testing mechanisms for existing and new staff, the
highest profile of which is ACI – The Financial Markets
Association with its ELAC (electronic learning, attestation and
certification) portal, however as a manager at a major trading
firm points out, “Most of history’s most notorious criminals
probably had a great school report.”

The point that simply reading a document and ticking a few
boxes to show both understanding and compliance hardly
means a misdemeanour won’t be committed is well made. This
is seen as a potential sticking point on adherence by some in
the industry who express the concern that the institution will be
sanctioned heavily for the actions of an individual who would
have agreed to adhere to the Code’s values.

In reality, this is an argument made by lawyers who are
naturally conservative by nature and see a threat around
every corner. “It was made clear very early on that the various
iterations of the Code were not to be sent to the lawyers,”
says a senior manager who was involved in the drafting of the
Code. “These are principals and we want them to stay that
way, get the lawyers involved and you are bogged down in literally years of to-ing and fro-ing over the smallest details.

“I think it depends upon the oversight framework put in at
the institution,” the senior manager continues. “If a firm can
demonstrate it has adequate oversight and has made clear to
staff that they too are responsible, then the buck stops there. I
don’t believe a surveillance system exists that can spot and
stop all misconduct before it happens, it’s unrealistic, so the
key will be taking all possible steps. Sometimes you just have
to accept that the best measures in the world will not stop a
very clever criminal.”

Surveillance

If the institution is going to effectively stop individual
misconduct, what do they need to do? As often seems the
case, the answer lies in technology. “If you look at trader
misconduct in the chat rooms, fingers were pointed at desk
managers, but how can they be expected to know what
someone is typing on the other side of the desk or even in a
different room?” asks a source familiar with the Cartel scandal.
“If someone is having a conversation, you pick up snippets and
ask questions, but you can’t expect busy people to read all
these chats – that’s a job for audit and compliance.”

A former trader now running a quantitative analysis business
agrees. “Institutions need to do more than they did – you can’t
just dip into five minutes’ worth of a year’s conversations,
surveillance has to be constant.

“Most of the major banks now have rudimentary proprietary
systems in place, or they have bought something off-the-shelf
that looks for key words, but there are hundreds of smaller
institutions that have little or nothing,” the quant analyst
continues. “This is where the problem could come with them
signing up to the Code, they want – and need – to adhere to
the Code, but they don’t have adequate oversight. It puts them
in an exposed position.”

The quant analyst goes further. “If institutions are really
serious about this they will probably look at how some of the
online giants like Amazon and Facebook operate. These firms
build a digital profile of their clients so they can sell them more,
but it’s not a huge leap to build a digital profile of an employee.

“By creating such a profile, the institution will be able to spot
actions that are outside of the norm – if a trader suddenly
starts trading in a different style or at different times of the day
than they usually do, the system will be able to flag it. And
that’s what it’s really about, being able to raise red flags,” the
quant analyst adds. “Most humans are creatures of habit so
any deviation from the norm could be treated as an early
indicator of possible misconduct. You can’t stop someone from
wanting to break the rules, but if you can flag them early
enough you can protect the institution from potential fall out.”

When asked how easy it is to codify a set of principles, the
quant analyst responds, “Easier for some than others, but it
can be done – it’s just a question of setting parameters around
certain principles that have grey areas.”

As any user of the various social media services can attest,
surveillance, albeit in this case for the opportunity to sell
something, is a fact of modern life. This suggests that creating
these sophisticated surveillance systems would not necessarily
impact the individual that heavily – after all, they are used to it.

It may not be that easy, however, for as the e-FX manager
observes, while digital profiling is an excellent step forward it is
no panacea. “A lot of misconduct is planned meticulously – it
has to be to get around the existing systems which are pretty
strong – so any potential rule breaker will know they are being
digitally profiled and can create a mass of white noise for
months with the aim of throwing off the surveillance function.
These people will get through, sadly, it’s really a question of
limiting the damage for both institution and fellow staff.”

So a good starting point for individuals is to read and digest
the Code’s principles. Most institutions rely upon escalation to
identify misconduct and more often than not the early
indicators are at junior level. If individuals are fully conversant
with the Code, they will at least be able to flag actions they
believe are outside its guidelines. Perhaps one of the loudest
messages to individuals should be that just as ignorance of the
law is no excuse, neither is ignorance of the Code’s principles.

Galen Stops

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