The Last Look…

In amongst the recently-published minutes of the latest Global Foreign Exchange Committee meeting was an interesting – and most welcome – initiative, that could help the FX industry avoid being dragged into another, yet unknown, conduct crisis.

I understand it is difficult for any standard-setting body to predict what will happen in the world, but there has always been a sense, this is especially the case with regulators and other overseers, that they are reactive, rather than proactive. This is helpful, but not very, because inevitably someone is already in trouble and feeding the lawyers’ fees, before any guidance is provided. As an example, look at the chat rooms debacle, their use exploded, but few thought of how to actually monitor what was being said. People overhear phone conversations, they cannot, unless they are standing over the shoulder of the person typing, read onscreen messages.

To stress, I accept the nature of the task means being reactive will generally be the case, but I am not the only one to have argued that some changes can be prepared for, and at the very least, potential issues highlighted.

So, well done to the GFXC for establishing a new body, the Technology and Innovation Working Group. This group, which is still being formed, is tasked with analysing (and presumably reporting on) the implications and potential impact of technologies such as AI, stablecoins and CBDCs, on the FX market.

This is a smart, proactive mood, because in the wider world it becomes apparent by the day that equity markets in particular have underestimated the likely impact of AI on a number of businesses – why should the FX market be immune to such a trend? Equally, whilst it has some skin in the game, the BIS has historically been relentless in warning of the risks of some stablecoins and digital assets generally, do these warnings have genuine merit, or are they from a body defending its members’ own digital currency projects?

While the GFXC Working Group will not answer questions like the latter, more broadly, there will be an impact on the industry from stablecoins (and maybe CBDCs if they ever get here), so it is good that we have expert minds looking at the issues and challenges before they are really embedded.

This is important, because historically there has nearly always been a correlation between true innovation and behaviour – and it has rarely been positive (and by “true” I am dismissing 90% of the “innovations” claimed in press releases over the years!). This is not to say that some of the innovators of the past have set out to behave poorly, more that there is an enthusiasm in innovation that sometimes means ethical, or conduct, issues, can be overlooked or brushed off to be visited another day.

All industries face ethical challenges associated with the advance of technology, and FX is no different, but at the same time innovation cannot, and should not, be supressed

Innovators are pushing boundaries by their very nature, this inevitably provides them with an advantage in some cases that tilts the playing field – something regulators don’t like that much.

The chat room issue was a straight one of lack of oversight, but, for example, plenty of people saw latency arbitrage coming to FX because it was in other markets, and the tech at some firms was improving to the point that they could literally take money out of the market repeatedly. The FX industry’s answer was another innovation, last look, and while it was undoubtedly successful in curbing latency arbitrageurs, it brought its own issues when it too, was pushed too far.

The GFXC did not exist at this time to study and debate these issues – local FX committees were of course, but how can they provide guidance in a market serving over a hundred jurisdictions? – but it is now, hence why it is great that this new committee has been established.

All industries face ethical challenges associated with the advance of technology, and FX is no different, but at the same time innovation cannot, and should not, be supressed. The hope is that some of the firms leading true innovation will provide representatives on the GFXC Working Group to help it really get into the weeds of what is possible. The greater the understanding, the better the associated guidance is likely to be, and that latter point is an important one to remember. The GFXC does not rule, it guides, but its guidance provides clarity, or at the very least, a pointer as to where to look for potential challenges’

As is the case with all best practice works, if a protagonist is determined to break the rules, they will do so, but the output from such a working group will, or should, deter those less determined and, more importantly, help others avoid accidentally straying into risky territory. This is the core value of a committee like the GFXC.

Typically the FX industry operates with a very intelligent workforce, but inevitably, skill sets vary, not least when it comes to deep technological understanding. This means that a group dedicated to help build understanding of the issues around the tech, rather than the workings of it, will be incredibly valuable.

More pertinently perhaps, the GFXC is showing the way to similar bodies by trying to get in front of the next, still unknown, set of issues, rather than wait for something to happen and then provide a remedy. For this, it is to be congratulated.

colin@thefullfx.com