Ripping Off Your Clients Is Naughty in New Currency Market Code

  • Report covers ethics, information sharing, execution
  • Market wants to see stricter guidelines to rebuild trust

It took the world’s largest central banks and 35 of the biggest players in the $5.3 trillion-a-day global currency market eight months to devise a code of conduct for an industry reeling from a price-fixing scandal that rocked global finance.

Those in the business say they still have work to do.

Some of the code’s main takeaways: Act honestly, fairly and with integrity in dealings with clients; strive for high professional standards; identify and deal with conflicts of interest.

"This is exactly what I tell my seven-year-old -- be honest, be kind and be helpful," said Kevin McPartland, head of research for market structure and technology at Greenwich Associates, a Stamford, Connecticut-based financial-services consulting firm. “If we’re coming to a place where the ground rules were barely existent into a new world -- that is some progress.”

Industry leaders are looking to beef up standards in the wake of last year’s $9 billion in penalties for some of the world’s biggest banks after they pleaded guilty to manipulating benchmark rates at the expense of clients. Central bankers will drive adherence to the voluntary guidelines, which aren’t as rigid as regulations -- and if that doesn’t work, officials have said stricter rules will follow.

Rebuilding Trust

Under the auspices of the Bank for International Settlements, which represents the world’s biggest central banks, representatives drawn from market makers, money managers and trading venues spent eight months crafting the 30-page document. It also addresses the controversial currency-market practices of pre-hedging and price markups, as well as information sharing, which banks have clamped down on by withholding commentary and trading ideas from clients for fear of breaching regulations. Final publication is scheduled for next year.

“The foreign exchange industry has suffered from a lack of trust,” wrote Guy Debelle, the assistant governor of the Reserve Bank of Australia, who led the central bankers’ group steering the formation of the guidelines, in a statement. “The market needs to rebuild that trust, so that participants and the public have much greater confidence that the market is functioning appropriately.”

For a Gadfly commentary piece on the evolution of the FX market, click here.

A quarter of the current code deals with order execution. It recommends that market participants who handle client orders should be truthful in their statements, use clear and unambiguous language, make clear whether prices are firm or indicative, and not enter into transactions with the intention of disrupting the market.

“That we have to tell grown adults that they should have ethics in foreign exchange markets ‎is incredible,” Mayra Rodriguez Valladares, a former New York Fed foreign-exchange analyst who conducts training for banks and financial regulators as managing principal of MRV Associates in New York, said by e-mail. “What next? Should we remind them to wash their hands after going to the restroom?”

Key Recommendations

Other topics and recommendations include:

  • Information Sharing: Limit access to, and do not disclose, confidential information; communicate in a way that is clear and not misleading; provide market color without revealing private information
  • Confirmation and Settlement: Implement systems to automatically transmit secure trade data that can’t be altered or deleted; identify and resolve discrepancies in trading and settlement as soon as possible

Investigations into foreign exchange began after Bloomberg reported on the collusion in 2013. Bank efforts were focused on the WM/Reuters 4 p.m. fix, used to value trillions of dollars of investments worldwide and determine the price some companies and fund managers pay to swap currencies.

‘Brazen Display’

The rigging of currency rates via chat rooms, including the self-described “Cartel,” was a “brazen display of collusion,” U.S. Attorney General Loretta Lynch said in a statement in May 2015, after levying fines against Barclays Plc, Citigroup Inc., JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and UBS Group AG.

Reverberations from the scandal are still being felt, as some employees on foreign-exchange desks are suing banks for what they claim was unfair dismissal.

Central bankers chose David Puth, chief executive officer of CLS Group Holdings AG in New York, to lead dozens of senior market participants in an effort to hammer out the standards. Starting last year, four successive working versions of the document received more than 3,000 comments from industry professionals. A second phase will deal with electronic trading and be added to the document for final publication in May 2017.

For more about David Puth’s efforts, click here.

While the code is " intended to promote a robust, fair, liquid, open, and appropriately transparent market,” it “does not impose legal or regulatory obligations on market participants nor does it substitute for regulation,” it says in the introduction.

“This is how dire the state of the industry is that you have to tell people ‘please remember to behave and don’t cheat the customer,’”Rodriguez Valladares said. “It’s so incredibly basic.”

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