The Last Look…
Posted by Colin Lambert. Last updated: April 12, 2021
For those of you that follow the English Premier League, I am a West Ham fan – a team that has historically demonstrated an almost heroic ability to underperform in all circumstances. More recently, however, they have actually been rather good – but they have still managed to display a willingness to imperil comfortable leads. The latest example was just last night when, for the third week in a row, they were 3-0 up and nearly didn’t win.
I am also a cricket fan and in recent years the game has introduced the Decision Review System (DRS) that uses technology to amend ‘howlers’ by umpires. The DRS means that players who would have previously considered brazenly trying to dupe the umpire into the wrong decision (especially in front of tens of thousands of their own fans) now have second thoughts as they neither want to appear foolish, or, more importantly, a cheat.
Why is this relevant? It probably isn’t, but I just wanted to make people understand why I really dislike complacency – in my sporting spectating life I have an almost weekly lesson in why it is invidious – as well as to highlight the benefits of everyone being judged by the same standards.
All of which brings me to the FX Global Code and the latest outreach effort by the Global Foreign Exchange Committee. There are some sections of the industry that still view the Code as something that has fixed sell side behaviour and therefore can be consigned to a dusty shelf in a side office. Others, feel that sufficient light has been thrown upon darkness and there is no need for further transparency of action, because all the necessary hoops are being jumped through when it comes to disclosures.
I heard both views at the end of last week after publishing our story on the GFXC outreach initiative, and both are wrong. If I am to look at their motives through a generous lens, they smack of complacency. Less generously, I only see people with something to hide, because the argument that the Code has fixed the market’s problems just doesn’t stand up to scrutiny. It has in some areas, but work still remains to be done – just look at the range of areas we are being asked to feedback upon; settlement risk, algos, anonymous trading and, most importantly, disclosures.
Those who don’t see the Code as needing more work (and from the start it has been presented as a living breathing document that will reflect change in the industry) would probably have halted work on it after the final iteration and stamped the cover with “job done” before despatching it to a filing cabinet. Their standpoint has been shown up by the sheer number of issues raised for feedback.
The GFXC is to be congratulated on achieving consensus on these issues and bringing the industry to a stage where, assuming (which is, ironically, complacent of me!) the next feedback process doesn’t raise a “fatal flaw”, we will have greater clarity around practices and, importantly, clients will be able to better judge how fairly they are being treated.
Standardised approaches to trade rejects, pre-hedging, last look, and disclosures would make life easier and should be a priority for the industry.
What I like most about the proposed changes to the Code is that they make life harder for those less willing to embrace the highest standards. Customers are being given the freedom to ask penetrating questions, not about whether firms support disclosures – everybody does, or should – rather do these firms support standardisation? If a service provider is keen to keep disclosures as they are, or to fill them full of legalese, you have to ponder their motivation for doing so? What possible business intelligence can be given away by making disclosures of certain practices standard with the aim of helping clients better judge how fairly they are being treated?
I would also be suspicious of those who go half way towards reform. As an example, look at time stamps, an area highlighted by the GFXC last week. This is low hanging fruit and easy to fix, because I don’t believe we should be thinking of atomic clocks, and I don’t believe it is important if the time stamp is out by a second or two of the actual trade being executed. We don’t need to worry, as some will have us do so, about exactly what part of the sentence (or word) signifies the trade is done. The problem with time stamps, especially around custodian trades, was they were being executed at random times, sometimes hours after being received, and were not being time stamped at all. A time stamp to within a second or two means that anyone still considering executing a bunch of admin trades near the high or low of the day, whenever that may have been, would have to think again.
My point is, sometimes, close enough is good enough, so we should question the motives of those who want to make this a big issue, over challenges like disclosures around last look, agency versus principal, pre-hedging, and trade rejects.
Standardised approaches to these issues would make life easier and should be a priority for the industry. If we have a common language for trade rejects, “good” LPs would be at an advantage and, equally, those consumers behaving badly would have less opportunity to get away with their conduct through browbeating a salesperson with threats of removal of business.
Pre-hedging is a trickier issue, I accept, but as I wrote recently in a column, clearer language and a more standardised approach would help.
Last look? Well that, I am afraid is another easy one. If we have standardised disclosures clients will be able to ask tricky questions of the service providers, who would also, it should be noted, be able to explain very succinctly why certain customers are treated differently thanks to their style of trading.
Hopefully last week’s proposed changes to the Code will represent a big step forward. My biggest concern is one that I know is shared by many members of the GFXC, that disclosures are seen as something that do just enough to pass inspection but allow all sorts of behaviour behind a wall of secrecy. The proposed changes should go a long way to make that less of an issue and those who are opposed to it should understand that arguments of leaking too much IP through disclosures and questionnaires will be seen for what they are – an attempt to justify behaviour that is broadly unacceptable.
There is a lot to be said in “If you’re doing nothing wrong, you should have nothing to hide,” and as some of you may recall, in 1995 C & C Music Factory had a hit song with Things that make you go hmmm. If nothing else, the GFXC’s proposed changes should ensure that anyone who does go “hmmm” looks deeper into how and why they are doing business with certain counterparties.