Promotion of Ethics, Simplicity and Transparency in Finance
Sunday, October 25, 2015
Now a Crime In Venezuela - Publishing FX Rates
It would be funny if not true - similar to Argentina's fining consultants who tried to calculate the true rate of inflation a few years ago, the Venezuelan central bank is now suing a web site for publishing black market fx rates. To state the obvious, the problems in Venezuela are not related to people knowing the current black market rates but instead, the economic policies of the government. Of course, a lawsuit provides the illusion that it is otherwise.
Tuesday, October 6, 2015
Investigations of Electronic FX Trading Continue
Reuters reports that the New York Department of Financial Services (NYDFS) investigation of several money center banks for FX rate manipulation on electronic trading platforms is continuing. They report that NYDFS has interviewed dozens of traders and executives at Barclay's, Deutche Bank and Credit Suisse among other banks (NYDFS has its strongest remit with foreign banks) over the past several months. Subpoenas have also been sent to BNP, Goldman Sachs and Societe Generale according to Reuters sources.
NYDFS has already been known to be investigating FX algorithms on these platforms at the banks to determine if there is an attempt by the banks to advantage themselves at their clients' expense during the time between a rate being posted and then being accepted by a client. The concern is that this period may be used to front run client orders or otherwise manipulate FX rates. Earlier bank settlements with regulators covered spot market trading, but NYDFS agreements particularly, did not cover electronic trading. The Department of justice is also investigating FX electronic trading.
No information is available on how these investigations will play out against the various banks involved. The fact that they continue and appear to have widened from initial reports limited to Barclay's and Deutche, may indicate that regulators have found potential issues worthy of investigation, but do not provide clues as to the outcome.
NYDFS has already been known to be investigating FX algorithms on these platforms at the banks to determine if there is an attempt by the banks to advantage themselves at their clients' expense during the time between a rate being posted and then being accepted by a client. The concern is that this period may be used to front run client orders or otherwise manipulate FX rates. Earlier bank settlements with regulators covered spot market trading, but NYDFS agreements particularly, did not cover electronic trading. The Department of justice is also investigating FX electronic trading.
No information is available on how these investigations will play out against the various banks involved. The fact that they continue and appear to have widened from initial reports limited to Barclay's and Deutche, may indicate that regulators have found potential issues worthy of investigation, but do not provide clues as to the outcome.
Thursday, October 1, 2015
FSB Updates FX Benchmark Progress
The Financial Stability Board (FSB), created in 2009 by the G20 to reform international financial regulation, includes as part of its mandate a role in standard setting and in promoting members’ implementation of international standards. In September 2014 it issued a report highlighting recommended solutions to prevent a repeat of the FX benchmark scandal. Today it released an update to look at progress made since that report.
The update is fairly positive ("having moved the market in a favourable direction"), highlighting improvements, but also mentioning areas where it believes that more work needs to be done.
The points made include:
1) There have been useful reforms in the methodology used in the WM Reuters (WMR) fix but that more can do done, and mentions certain central banks adjusting their fix methodologies as well. The FSB reiterates that all fixes need to be reviewed, not just the WMR fix.
2) "Recommendations suggested to increase transparency in pricing for fix transactions have seen good implementation among the largest market participants and for the most used benchmarks, but that elsewhere there is scope for further improvement".
3) "Steps to separate dealers’ fixings business from other activities are being taken by the larger participants and in the most active markets, but again there is room for further implementation in other areas of the FX market. For the execution of benchmark transactions, industry-led initiatives to promote greater use of independent netting and execution facilities are seeing welcome progress".
4) "Work is underway to improve market conduct practices, both within individual firms and through market-wide initiatives, including the global effort underway to develop a single code of conduct for the foreign exchange market through the Bank for International Settlements (BIS) Markets Committee working group on FX markets".
5) "While many index providers and end-users have increased their focus on the due diligence around FX benchmark use, there is scope for greater follow-through on this on the part of some market participants".
All in all, it appears that while some additional fix changes may be seen, for the most part fix reform will primarily involve broadening the changes already made to cover additional fixes and additional market participants. The probable exception will be the new international code of conduct being created by the BIS. This will replace the many different codes currently in force in markets around the world and will impact bank behavior.
The update is fairly positive ("having moved the market in a favourable direction"), highlighting improvements, but also mentioning areas where it believes that more work needs to be done.
The points made include:
1) There have been useful reforms in the methodology used in the WM Reuters (WMR) fix but that more can do done, and mentions certain central banks adjusting their fix methodologies as well. The FSB reiterates that all fixes need to be reviewed, not just the WMR fix.
2) "Recommendations suggested to increase transparency in pricing for fix transactions have seen good implementation among the largest market participants and for the most used benchmarks, but that elsewhere there is scope for further improvement".
3) "Steps to separate dealers’ fixings business from other activities are being taken by the larger participants and in the most active markets, but again there is room for further implementation in other areas of the FX market. For the execution of benchmark transactions, industry-led initiatives to promote greater use of independent netting and execution facilities are seeing welcome progress".
4) "Work is underway to improve market conduct practices, both within individual firms and through market-wide initiatives, including the global effort underway to develop a single code of conduct for the foreign exchange market through the Bank for International Settlements (BIS) Markets Committee working group on FX markets".
5) "While many index providers and end-users have increased their focus on the due diligence around FX benchmark use, there is scope for greater follow-through on this on the part of some market participants".
All in all, it appears that while some additional fix changes may be seen, for the most part fix reform will primarily involve broadening the changes already made to cover additional fixes and additional market participants. The probable exception will be the new international code of conduct being created by the BIS. This will replace the many different codes currently in force in markets around the world and will impact bank behavior.
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