Six banks have been fined more than $9 billion so far for attempting to manipulate FX benchmark rates, including the WM/Reuters London 4pm fix, and further fines are still expected.
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[Banks] have come along reasonably well, but we have to wait and see how effective these changes are Guy Debelle, RBA |
Guy Debelle is the man charged with looking under the bonnet of FX benchmarks by the Bank for International Settlements and has proposed a series of reforms, as part of the global effort to clean up currency markets.
The assistant governor of the Reserve Bank of Australia fired a warning shot at banks in February, with Debelle publically saying, in no uncertain terms, there was a “strong expectation” they implement the recommendations in his report – warning that, otherwise, “the likelihood of a regulatory response will increase”.
Banks step up
It appears the banks have taken heed of his warning.
“Banks have come a fair way, even in the last three months,” says Debelle. “Generally speaking, there has been a pretty reasonable job of banks implementing our recommendations regarding the fix.”
In the wake of the rigging scandal, a number of banks now segregate client requests for dealing at the fix from the rest of their order books, so that only the trader handling the fix transactions can see them.
In addition, clients that want to trade at the benchmark fix are now offered clearer, more transparent choices by their banks. These include: paying a fixed fee for trading at the fix; paying a standard bid-offer spread which is published by the fix provider; or renting a bank’s algorithm to do the trades.
“We see a number of banks now charge for [trading at the fix], and separate their information flow a lot better than they used to,” says Debelle.
Increasingly, banks are trading client orders at the fix electronically as opposed to delegating it to an individual, to eliminate human error.
“The share of fix orders that are done electronically using algorithms has gone up considerably – I would say it is a lot higher than six months ago,” says Debelle. “It appears that there are a lot more trades done through algorithmic execution than voice, or with any human involvement.”
This is perhaps also a sign of the times – according to the latest Euromoney FX survey, clients executed more than half their orders electronically for the first time in the history of the survey.
Serious about segregation
Regulators discovered that traders at different banks shared information about client orders through secret chat groups, such as “one team, one dream” and “the A-team” to devise trading strategies to manipulate the benchmark fix in their favour.
Traders did this to ensure the rate at which they had agreed to sell a currency to their clients, for example, was higher than the average rate they had paid to buy the currency.
Now banks have shut down multi-dealer chat rooms, and are making a concerted effort to separate trading flows.
James Kemp, managing director for global FX at industry body Global Financial Markets Association, says banks started to take a “strong look” at various practices around the fix two years ago, but are now scrutinizing their whole business model, including how they trade with clients.
“Disclosure with clients needs to be much more transparent and upfront to remove ambiguity of those trading relationships,” says Kemp. “We have seen more and more of that coming through.”
Compliance, compliance, compliance
Banks are undoubtedly taking compliance more seriously in their FX businesses, with a focus on improving monitoring and surveillance, better training, hiring more compliance staff and limiting access to electronic chat rooms.
FX salespeople also think twice before sharing information with clients, says Kevin McPartland, head of market structure research at Greenwich Associates.
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“Salespeople are generally less comfortable giving market colour to clients than they used to be,” he says. “There is a risk of being viewed as saying something improper … They are less inclined to say anything at all.”
Some traders feel the “fun has been taken out of FX”, with one trader at a French bank lamenting the large number of emails about compliance. Another French bank has reportedly installed a yellow line around its London trading floor – traders caught using their mobile phone inside the yellow line can expect a visit from the compliance police.
“We see more attention paid to conduct – there are more compliance people on FX desks,” says Debelle.
However, despite the reforms, he still maintains a healthy dose of caution: “I would say [banks] have come along reasonably well, but we have to wait and see how effective these changes are.”
The FSB is still assessing banks’ implementation of reforms; the findings from Debelle and his team are expected to be published later this year. None of the banks fined by regulators wished to speak to Euromoney for this article.