What Does Neil Phillips’ Conviction Mean for the FX Market?
Posted by Colin Lambert. Last updated: October 25, 2023
It took just half a day for a Manhattan jury to convict former Glen Point Capital CEO Neil Phillips of commodities fraud this week – he was cleared of conspiracy charges – over allegations he deliberately targeted an FX option barrier on Boxing Day 2017 to trigger a $20 million payout. Phillips will, no doubt, appeal the decision, after all, several OTC market-related convictions have been overturned, but what does a US law court finding the targeting of barriers illegal mean for the FX industry?
Probably the first thing to note is that Phillips’ activity on what was likely to be the quietest day of the year in FX markets, doesn’t pass “the pub test”. Anyone who has worked in the FX markets that I spoke to about it reflected my own feelings that the trading in USD/ZAR that day wasn’t a good look.
It is not so much that the barrier was targeted, I think we have to accept that as these events near there is inevitably going to be some protecting/targeting going on, more that Phillips did so from so far out. It’s one thing selling into a barrier when, in USD/ZAR for example, it is one or two big figures away, from more than 10 it looks more like a deliberate attempt to run the level.
And, of course, we have to throw in the kryptonite that has taken care of too many people in this industry – the chats. These show proper intent to trigger the barrier and demonstrate either a wilful ignorance of what would happen when, not if, they became public; or an arrogant belief that he was untouchable.
The chats were inevitably going to become public because the trading was so unusual – and obvious. Someone, somewhere, is going to have their curiosity piqued by a 13 big figure move, amidst much higher volume than usual, in a relatively obscure currency pair, whose domestic market wasn’t even open that day. If this activity had taken place even on the 28th or 29th of December when more markets were open, it probably wouldn’t have been noticed, unless the chats were flagged. It could also be the case, that on those days, it would not have taken much more to trigger the option that the $725 million Phillips sold.
There is also the phone call, played at the trial where Phillips told one of his traders “We might have to start [expletive deleted, but we all know what it is] around in dollar/rand tonight”.
So the evidence, especially around the crucial factor of intent, seems overwhelming, and the jury clearly agreed. This leaves then, the question of how the FX industry should look at this judgement?
The FX Global Code, as I have pointed out before in this case, is pretty explicit that Phillips’ behaviour is unacceptable – it even uses an Asia-themed case to highlight poor conduct – so from that perspective, the industry has itself covered. It is also interesting, however, that the trial revealed that Morgan Stanley bought $560 million in USD/ZAR during Phillips’ selling, so some form of barrier defence was probably taking place.
This was overlooked by the jury and it will be interesting to read the judge’s summary of the case when it is published, presumably sometime next year. The likelihood is, the conviction was gained because of the question of intent – Morgan Stanley could be seen to be hedging its book according to a pre-set and widely-used pattern; Phillips was on the chat and the phone talking about banging the level. One offers a degree of ambiguity over intent, the other a smoking gun.
You may argue whether it is right that behaviour that cost a multi-billion dollar earning institution $20 million merits jail time – he is facing up to 10 years on an upheld conviction – but it is about more than that even
This should not mean, however, that the FX industry carries on regardless, for the targeting of barriers has been found illegal in a US court, and that could have some consequences. Obviously, spotting such activity in a “normal” day’s trading is nigh on impossible, Phillips’ big error was trading in a fashion, and at a time, guaranteed to attract attention. There may be legitimate hedging practices around barriers that will continue, and if they are programmed and part of a broader hedging strategy then I don’t see the problem. If, however, anyone feels disposed to talk to someone else about defending or attacking a barrier (or a stop-loss for that matter), I suggest they think again, for that is what will shine a light on their subsequent trading. It may be innocent chit-chat, but if a passing comment mentions a barrier and then the subsequent trading follows the pattern of defence or attack, trouble is brewing.
To some, the whole business of trading around barriers is a big game – in this case the buyer sold to try to trigger the barrier and then bought it back, the seller tried to defend and then had to sell it back. In all probability, given liquidity around that time, Phillips probably lost on his triggering trades and Morgan Stanley made on its defence – it’s just the small matter of the $20 million payout once 12.50 was hit!
It may be a game, but for Phillips it has turned serious. You may argue whether it is right that behaviour that cost a multi-billion dollar earning institution $20 million merits jail time – he is facing up to 10 years on an upheld conviction – but it is about more than that even. I have written before that I don’t believe Mark Johnson should have been convicted, let alone spend time in jail, but his big problem was the original decision. In the US, once convicted, the burden of proof swings to the accused, and it is a hard road to reversal – Johnson is still going some seven years on.
With this conviction, Neil Phillips faces either time in a US prison or a long, stressful and hugely expensive period trying to overturn it. With this conviction, the FX industry might want to pause and reflect, and be just a little bit more careful about how it talks about, and trades around, option barriers.