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Citadel, Vanguard Call for End to Controversial FX Last Look

Updated on
  • Firms submit feedback on practice to Global FX Committee
  • Letters published on Nov. 3; response expected by year-end

More opponents of “last look,” the controversial practice in currency markets that allows dealers to back out of losing trades, have come forward to air their grievances to central bankers and industry participants.

Their feedback comes at the behest of the Global FX Committee, or GFXC, which is comprised of government officials and market participants. About two-thirds of respondents support changing global foreign-exchange guidelines to limit the use of last look, including Citadel LLC, Vanguard Group Inc. and DRW Holdings LLC, who called for ending the convention altogether. Several banks and a foreign-exchange industry group said the practice is acceptable if adequate disclosures are made to clients.

The GFXC asked for comment on the lightning-rod issue in May when it released the FX Global Code, a list of 55 principles aimed at boosting standards. Barclays Plc agreed to pay $150 million in 2015 for allegations of abusive practices relating to last look, another black mark on an industry tarnished by a global price-rigging scandal. The 75-page document didn’t settle the debate.

“We believe that policymakers and regulators can and should lead an orderly market-wide transition away from last look,” Stephen John Berger, managing director of government and regulatory policy at Citadel, said in a letter.

The GFXC will meet in London on Nov. 14 to discuss the feedback and plans to publish a response before year-end, it said on its website.

‘Front Running’

The FX Global Code says trading that uses information from clients’ transaction requests, including hedging during what’s known as the last-look window, is “likely inconsistent with good market practice.”

Twenty-one of the 33 comment letters backed stronger wording or the removal of the word “likely” from that section of the guidelines. Contributions came from a variety of market participants, including investors, banks, trading venues, industry groups and anonymous individuals.

Opponents of last look say that client information can be abused by allowing a firm to learn the intentions of other participants or halt unprofitable transactions. Proponents say it enables dealers to quote prices on a wider range of platforms and defend themselves against faster, more sophisticated traders.

“Market participants receiving trade requests that utilize the last look window should have in place governance and controls around its design and use, consistent with disclosed terms,” Bank of America Merrill Lynch wrote in its feedback. “A market participant should be transparent regarding its last look practices in order for the client to understand and to be able to make an informed decision.”

Barclays said that trading during the last look window which uses information from client requests is a conflict of interest and not good market practice.

Disclosures and increased transparency don’t go far enough for Andy Maack, global head of foreign-exchange trading at Vanguard, who’s been a vocal critic of last look.

“Trading in front of a client’s order after you are aware what side and direction the client is, is front running and should never be allowed under any circumstances,” Maack wrote. “It is my belief that last look is no longer needed, it is a tool that allows potential manipulation and does not promote trust, integrity or transparency in FX markets.”

Here’s a selection of other comments:

  • State Street Global Markets said the language on last look “should be strengthened” in the code
  • UBS said trading activity that uses information from a client’s trade request during the last look window may create signals that move the market, generally in a direction that does not benefit the client
  • DRW encourages the GFXC “to consider taking steps to prohibit the use of last look”
  • Thomson Reuters said “we believe that if ‘cover and deal’ is precluded as a best practice, the effect would be a material reduction in the liquidity of the FX market available outside the top tiers”
  • The China Foreign Exchange Committee, which consulted participants in the nation’s interbank currency market, said respondents generally agreed that “during the last look window, the client information should not be used for inappropriate purposes or be used against the client”
  • The Foreign Exchange Professionals Association suggests adding to the code to include: “a market participant should be prepared to provide data and other information to the clients in order to enable the clients to make a risk determination”
  • TD Securities said no modifications are needed
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