The Last Look…

Last week’s column prompted quite a response, which can be summarised thus: How confident are you that adhering to your institution’s rules will be enough if the prosecutors come calling?

Last week I argued that in spite of the rush of convictions being overturned both sides of the Atlantic, people still had to be careful, especially if it concerns an area lacking regulatory clarity, and was a little surprised by the number of correspondents who claimed not to have thought of it. Effectively, their argument was, ‘we adhere to the Global Code and our institution’s internal rules, therefore we are safe”.

This could be the case (and notably, not all agreed with that view) but my sense is these people have ignored the most important part of my argument – the need for regulatory clarity. There was a warning from those on the other side of the debate, who argued that the slightest hint of a grey area and the institution will wash their hands of an “appropriate staffer” as one put it.

It is very easy to relax and see most bases covered by the FX Global Code – and there is no doubt that it has made the market a “safer” place for individuals, whilst providing a degree of clarity for institutions, but the fact is, as a voluntary code, it cannot provide a solution to all problems. At the end of the day, it is a set of guidelines that will help people keep on the straight and narrow and highlight obvious malfeasance – it will not help with grey areas unless the FX industry itself knows how the regulators/prosecutors will think.

The response was mixed as to whether these overturned convictions will lead to prosecutors hitting the pause button on further actions, some saw it as inevitable, others as depending on the political mood of the day – and there is something in that. The fact is, we do not know the nature of the next “scandal”, only that there is likely to be one (my money is still on pre-hedging and/or the Fix, for what it’s worth), therefore predicting the reaction of a future set of prosecutors is impossible – hence the need to be careful.

That said, surely there has to be a note of caution injected into at least some of the ambulance chasers out there, if not those being directed by governments. On which note, I am indebted to a friend who highlighted this note from law firm Wilmer Hale, looking at the Mark Johnson case along with two others – it’s well worth a read, not least because while it does suggest prosecutions such as that in the Johnson case might be approached in a more careful fashion, in no way are the US authorities likely to back off from pursuing other types of market misconduct.

So while the FX world is a safer place with the Code in place, and what was a misguided prosecution overturned, there is little room for complacency. Off the top of my head I can think of three areas where there is still some uncertainty – last look, mis-selling and the aforementioned pre-hedging.

I see parallels in pre-hedging and mis-selling with both the Johnson case and those involving Libor, namely grey areas that institutions could exploit 

With last look, the Code recommends deals are accepted or rejected as quickly as possible, so where does asymmetric latency fit in there? With the alleged mis-selling, we have had court actions already and, reportedly, a bank providing compensation for clients over FX derivatives that cost them money; and with pre-hedging there have been lawsuits against banks, notably in Australia.

I am prepared to say that asymmetry in last look is a deliberate policy that may be imposed to help clients, and therefore is not necessarily a grey area, just one that is an obvious breach of best practice with “good intentions”, but the other two? I have already written about the mis-selling, as has Eva (and I thought her column was better than mine, so in the spirit of the times am thinking of firing her), and it is clear that some clients claimed they understood the products when they didn’t. How do you account for that in a disciplinary environment?

On pre-hedging I have written even more (don’t worry, I’m not going into it again here), and the bottom line is, we are all waiting on IOSCO, but its consultation report late last year did not offer much hope for those desiring clarity, where does that leave us? Back with individuals being careful.

At the risk of going all “Arthur Scargill” (there’s one for the teenagers!), I see parallels in the latter two instances with both the Johnson case and those involving Libor. Put simply, there is enough of a grey area for an institution’s management to find fault somewhere with an individual’s actions and throw them under the bus to protect their own backs. People have already been fired from banks over alleged mis-selling and been pushed sideways or gently out the door for their involvement in pre-hedging, this above all else tells us to be careful.

The Wilmer Hale paper I referenced earlier highlights how prosecutors may no longer be keen to bring prosecutions on a “novel” basis, which is probably right. The same works the other way, however, and people need to be aware of “novel” solutions to market problems – after all, if you can convince me that “hedging ahead of the Fix” and “pre-hedging” are vastly different, I would be amazed…

colin@thefullfx.com