The allegations in this Bloomberg article reach new lows for fx traders. The story is that Lloyds had to sell a large amount of sterling for their own account. A trader notified a favored client beforehand so that the client could make money "front running" Lloyds' order. Not that allegations of collusion against clients' interests are acceptable, but the possibility that fx traders would harm their employers for self-enrichment (the article refers to getting future business from clients, learning about large trades in the future and maintaining relationships with other traders in the tight-knit trader community) raises the question of who was really running the trading desks - the traders or the banks?
Alleged activities in front of large orders, such as traders putting trades through their own accounts, notifying favored clients and traders at other banks so that those parties can front run the orders, if found to be true, may be a defense, albeit a weak one, for any banks found guilty of wrongdoing. Any bank claims of being unaware of improper activity may now seem a bit more plausible.
Promotion of Ethics, Simplicity and Transparency in Finance
Tuesday, March 11, 2014
Monday, March 10, 2014
BOE Governor Testifies Tomorrow; Will need to Defend the Bank's Integrity Regarding the FX Fix
The BOE Governor will testify before the UK Parliment's Treasury Committee tomorrow to defend the BOE in the wake of meeting minutes showing that there was knowledge within the BOE as early as 2006 of unusual trading around the 4PM London fix for foreign currencies. At this point the BOE says that it is unaware of any collusion between traders and BOE staff, however, there are many questions regarding specifically what the BOE was told and why this information was not passed up the chain of command.
Assuming that lack of collusion holds up under internal BOE investigation, the most likely explanation of why no action was taken may have to do with the age old problem of coziness between the regulator and the regulated. Examples have repeatedly come to light among utilities (gas, electric and pipelines), banks, insurance companies and when closely regulated in the US many years ago, the trucking and airline industries.
Assuming that lack of collusion holds up under internal BOE investigation, the most likely explanation of why no action was taken may have to do with the age old problem of coziness between the regulator and the regulated. Examples have repeatedly come to light among utilities (gas, electric and pipelines), banks, insurance companies and when closely regulated in the US many years ago, the trucking and airline industries.
Friday, March 7, 2014
Too True to be Good?
China, really, who knows? There are two points of view. At the risk of over-simplification, they are:
SINOPHILE: China is a huge resource of both labor and consumers. The country's in a great growth spurt for modernization and productivity improvements. The government seems to manage everything just right to maintain excellent economic growth year after year. China didn't even pause for the Credit Crisis.
SINOPHOBE: The ideas don't fly and the numbers don't add. With no respect for intellectual property and a long trail of economic data reminiscent of Bernie Madoff's investment returns, the China story can only have an ugly ending. Communism cannot beget the free flow of innovation, capital, risk, and prosperity.
With the recent news that the Chinese government has permitted the debt default of Chaori Solar, both the PHILEs and the PHOBEs have another data point. The former will appreciate the increasing Westernization of the Chinese corporate market. The latter will believe the dam is about to break to reveal to the world a deluge of negative financial tidings.
It's rhetorically convenient in an article of this type to stake out a position somewhere in the middle. But no! That's not how FinancialPests operate! We've planted our flag in one of these camps. Let us conclude with this quote from the GARP News article:
"[T]he ruling Communist Party has pledged to make the economy more productive by allowing market forces a bigger role."
Whether it's ideas that don't add, numbers that don't fly, or historians who don't believe what they're reading, something's not right here. In agreement with Shakespeare, we say time will tell. Give it ten years - to 2024, say. The current "China Model" will prove itself false.
SINOPHILE: China is a huge resource of both labor and consumers. The country's in a great growth spurt for modernization and productivity improvements. The government seems to manage everything just right to maintain excellent economic growth year after year. China didn't even pause for the Credit Crisis.
SINOPHOBE: The ideas don't fly and the numbers don't add. With no respect for intellectual property and a long trail of economic data reminiscent of Bernie Madoff's investment returns, the China story can only have an ugly ending. Communism cannot beget the free flow of innovation, capital, risk, and prosperity.
With the recent news that the Chinese government has permitted the debt default of Chaori Solar, both the PHILEs and the PHOBEs have another data point. The former will appreciate the increasing Westernization of the Chinese corporate market. The latter will believe the dam is about to break to reveal to the world a deluge of negative financial tidings.
It's rhetorically convenient in an article of this type to stake out a position somewhere in the middle. But no! That's not how FinancialPests operate! We've planted our flag in one of these camps. Let us conclude with this quote from the GARP News article:
"[T]he ruling Communist Party has pledged to make the economy more productive by allowing market forces a bigger role."
Whether it's ideas that don't add, numbers that don't fly, or historians who don't believe what they're reading, something's not right here. In agreement with Shakespeare, we say time will tell. Give it ten years - to 2024, say. The current "China Model" will prove itself false.
Asian Regulators Probing Reports of Oil Benchmark Manipulation
The Wall Street Journal reports that British Petroleum says that Asian regulators are probing potential oil benchmark rate manipulation, in addition to earlier reports of European and US regulators.
There are similarities to the claims in the FX markets where allegations involve major banks manipulating rates set by WM Reuters. Here it is Platts that sets the benchmarks involved, and last year large oil companies and Platts were subject to unannounced inspections by EU regulators. Reports are that Japanese and Korean regulators became involved within the last three months.
BP also reported that 15 class-action lawsuits have been filed in the US alleging manipulation and antitrust violations, including a case brought by oil traders. A similar number of cases have been filed in the FX allegations.
Both the oil and FX stories continue to unfold with few hints of an early conclusion.
There are similarities to the claims in the FX markets where allegations involve major banks manipulating rates set by WM Reuters. Here it is Platts that sets the benchmarks involved, and last year large oil companies and Platts were subject to unannounced inspections by EU regulators. Reports are that Japanese and Korean regulators became involved within the last three months.
BP also reported that 15 class-action lawsuits have been filed in the US alleging manipulation and antitrust violations, including a case brought by oil traders. A similar number of cases have been filed in the FX allegations.
Both the oil and FX stories continue to unfold with few hints of an early conclusion.
Wednesday, March 5, 2014
BOE FX Group Meeting Notes: FX Benchmark Rates and Concern on FX Options Discussed in 2006
While recent press reports indicated that FX dealers said that the BOE had discussed WM Reuters fix trading in 2012, BOE minutes and discussions from the BOE FX Chief dealers meetings just released confirm this. However,the minutes also include from a mid-2006 meeting that there was evidence of attempts to move the market during certain fix periods. Meetings in 2008 and 2009 also included this topic.
In addition, earlier reports indicated that some of the regulatory FX investigations include a review of option trading, particularly the attempts to defend or breach particular FX spot rates. The BOE meetings notes now show a discussion at a 2006 Group meeting that bank FX systems could be manipulated in such attempts. (Certain option position values can be dramatically effected by a particular spot rate at a particular time).
Thus these two issues were discussed at BOE meetings. Today the BOE suspended a staff member . While mentioning that there was no evidence of collusion by BOE employees regarding these issues, it was hinted that the suspension may be related to not raising these issues with the next level of BOE authority. The BOE also reported that the last of the FX Chief Dealers Group meetings was held in February 2013. A subsequent meeting was scheduled but never held.
This information indicates to us that the regulatory investigations into FX benchmark rates are continuing at full speed. If, in addition, there were attempts to manipulate spot rates to impact option positions, that would seem a more complicated investigation with less certainty of exposing any manipulation even if it did occur. This would more likely involve individual market actors without as clear a goal as a daily published fixing.
In addition, earlier reports indicated that some of the regulatory FX investigations include a review of option trading, particularly the attempts to defend or breach particular FX spot rates. The BOE meetings notes now show a discussion at a 2006 Group meeting that bank FX systems could be manipulated in such attempts. (Certain option position values can be dramatically effected by a particular spot rate at a particular time).
Thus these two issues were discussed at BOE meetings. Today the BOE suspended a staff member . While mentioning that there was no evidence of collusion by BOE employees regarding these issues, it was hinted that the suspension may be related to not raising these issues with the next level of BOE authority. The BOE also reported that the last of the FX Chief Dealers Group meetings was held in February 2013. A subsequent meeting was scheduled but never held.
This information indicates to us that the regulatory investigations into FX benchmark rates are continuing at full speed. If, in addition, there were attempts to manipulate spot rates to impact option positions, that would seem a more complicated investigation with less certainty of exposing any manipulation even if it did occur. This would more likely involve individual market actors without as clear a goal as a daily published fixing.
Tuesday, March 4, 2014
Who Run the World? Rating agencies?!?!
Gizmodo went beyond their usual comfort zone and published this post about rating agencies and one (of the many) proposed solutions on how to rid the evil that is ratings. In my years working in the capital markets I have heard many complaints about the rating agencies, but at the end of the day, investors rely on ratings. Why? Because they value the opinion of the agencies. If they truly thought that ratings were completely broken, why do they still rely upon them? As for the conflicts issue, well, nationalizing agencies only create more problems than resolve them. And if issuers are not supposed to pay, then that only leaves the investors. But guess who often complains about the possibly investors paying for ratings? Investors.
Saturday, March 1, 2014
If You Are Fired Tomorrow ....
.... What Will Your Successor Do Differently?
In the mid-1980's Andy Grove was President of Intel and Gordon Moore was the CEO. Intel had been losing money and market share for years in their core business of semiconductor memories. The competition was winning. Grove and Moore knew they could not turn it around but were afraid to admit it. At the time, Intel was memories. The core, culture, and success of Intel had been memories.
Grove asked Moore: "If we got kicked out and the Board brought in a new CEO, what do you think he would do?" Moore's quick, no-need-for-thought answer was "he would get us out of memories."
So that's what Grove and Moore did themselves. Until they had played out this odd decision-making device, they did not realize consciously this right answer that would be immediately evident to an outsider. One can take several lessons from this story. The most direct lesson is to ask yourself, when confronted with a seemingly intractable business or personal challenge, what would an outsider with my knowledge but without my "invested capital" choose?
We just finished reading Grove's Only the Paranoid Survive. Though 16 years in the past, Grove's management advice and stories remain worthwhile. We consider the excerpt above to be the best part.
In the mid-1980's Andy Grove was President of Intel and Gordon Moore was the CEO. Intel had been losing money and market share for years in their core business of semiconductor memories. The competition was winning. Grove and Moore knew they could not turn it around but were afraid to admit it. At the time, Intel was memories. The core, culture, and success of Intel had been memories.
Grove asked Moore: "If we got kicked out and the Board brought in a new CEO, what do you think he would do?" Moore's quick, no-need-for-thought answer was "he would get us out of memories."
So that's what Grove and Moore did themselves. Until they had played out this odd decision-making device, they did not realize consciously this right answer that would be immediately evident to an outsider. One can take several lessons from this story. The most direct lesson is to ask yourself, when confronted with a seemingly intractable business or personal challenge, what would an outsider with my knowledge but without my "invested capital" choose?
We just finished reading Grove's Only the Paranoid Survive. Though 16 years in the past, Grove's management advice and stories remain worthwhile. We consider the excerpt above to be the best part.
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