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Is Lasting Change Coming for FX Market Practices?

Traders Magazine Online News, April 28, 2017

Mark Follows

 

The Foreign Exchange (FX) market, one of the world’s largest financial markets, continues to face increasing regulatory scrutiny. Clearly, regulators are in agreement that deep and lasting change is still needed, especially as they review the findings of the aftermath of the various 2013-2014 global market manipulation events. FX market manipulation issues at the time were so prevalent, that global fines hit upwards of $10 Billion US.  

Among the penalties levied were those issued by the UK Financial Conduct Authority (FCA) which fined five banks for failings in their G10 spot FX trading operations, as well as those issued by the Swiss Financial Market Supervisory Authority (FINMA) which fined a large bank CHF 134m. Things were also grim in South Africa, where recently 17 banks faced prosecution for manipulating the rand.

Mark Follows

The main themes of regulator concern covered all the expected bases including risk management, lack of controls, compliance, conduct risk, culture, market abuse, and governance. Certainly, it is no surprise then that there continues to be increased regulatory scrutiny and a concerted effort to enhance standards in what is a systemically important financial market.

Globally, regulators have been vocal on FX failings. In the follow-up work to the fines delivered to financial institutions, regulators looked towards establishing measures that would result in real and lasting change in the financial markets. Perhaps easier said than done considering the complexity of FX, but necessary in such a critical global market. 

Let’s examine several of the main drivers for the desired, primary changes in FX markets. First, raising standards and strengthening regulation in FX were the subject of the UK Fair and Effective Markets Review (FEMR). FEMR proposed various changes, including creating a new civil and criminal market abuse regime for spot FX (filling the void left by MAR). Significant progress against FEMR recommendations have been made including creating the UK’s Senior Managers & Certification Regimes (SM & CR) and establishing the FICC Markets Standards Board (FMSB). The FMSB have produced guidelines for FX surveillance, which were a key contributor to the FX Global Code, and they also keep an eye on the wholesale FICC markets for emerging risks. I think it is safe to say that we should expect more to come from them in the future.

Another driver for change came from the FCA which followed up on its 2014 FX enforcement with an industry-wide remediation programme aimed at addressing the root causes of past failings, whilst driving up standards across the market. 

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