Regulating foreign exchange markets: The financial stability board’s latest report
(For an introduction to the importance of foreign exchange benchmarks, and how they differ from others such as LIBOR, you may be interested to read this article prepared by Vivienne in April 2014 for Commercial Dispute Resolution magazine.)
The manipulation of foreign exchange markets was again in the press last weekend with newspapers such as The Telegraph reporting that the Serious Fraud Office was about to announce it would pursue a criminal investigation. Indeed, yesterday afternoon confirmation duly came from the SFO that the Director had opened a criminal investigation “into allegations of fraudulent conduct in the foreign exchange market”. This comes some nine months after the Financial Conduct announced its investigation into global currency markets back in October 2013.
Coincidentally, on Thursday 15th July, the Financial Stability Board published its Consultative Document on Foreign Exchange Benchmarks (click here for the full report).
The FSB was established in April 2009 as the successor to the Financial Stability Forum, which was founded in 1999 by the G7 Finance Ministers and Central Bank Governors following recommendations by Hans Tietmeyer, President of the Deutsche Bundesbank. Its stated aims are to establish and co-ordinate the work of national financial authorities and the international standard-setting bodies, and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. It is currently chaired by Mark Carney, Governor of the Bank of England.
Members of the Financial Stability Board must commit to pursuing the maintenance of financial stability, maintaining transparency of the financial sector and implementing international financial standards. They must also agree to undergo periodic peer reviews.
The Consultative Document on Foreign Exchange Benchmarks includes 15 recommendations identified to prevent ongoing or further abuse of the benchmark system for FX trading. The document is comprehensive, and represents a thorough guide to the current system. It is well worth reading for those who may not have a comprehensive understanding of the FX trading market, but who may, in the coming months, be called upon to provide advice on the criminal law as it might impact upon that market or traders working in it. And at 33 pages, the report is a useful introduction to how this market works.
The most interesting recommendations for lawyers practising in financial regulation are numbers 8-13 which, broadly speaking, deal with the introduction and strict enforcement of policies, codes of practice and guideline standards. In particular:
- Recommendation 8 sets out that banks must establish and enforce their internal guidelines and procedures for collecting and executing fixing orders.
- Recommendation 9 suggests that market-makers should not share information with each other about their trading positions beyond that necessary for a transaction.
- Recommendation 10 says that market-makers should not pass on private information to clients or other counterparties that may enable those counterparties to anticipate the flows of other clients.
- Recommendation 11 proposes that banks should establish and enforce their internal systems and controls to address potential conflicts of interest arising from managing customer orders.
The Consultative Document goes on to propose that codes of conduct which describe best practice for foreign exchange trading should detail more precisely and specifically the extent to which the sharing of information between FX market-makers is allowed. Further, those codes of conduct should outline specific provisions on the execution of foreign exchange transactions. Most significantly the Document recommends that the participants should show a stronger demonstration of compliance with the codes of foreign exchange committees and their internal codes of conduct.
The emphasis on internal codes of conduct is interesting in the context of the fines that were imposed by the Financial Conduct Authority for the manipulation of LIBOR. For example, in the Final Notice published on the 2nd February 2013 against RBS, one of the failings for which it was fined was a failure to have in place any systems, controls, training or policies for the submission of LIBOR rates. A further identified failing was an inadequate transaction monitoring and control system.
Certainly as far as the FCA is concerned, then, it is clear that the institutions themselves must take responsibility for adequately training and managing their staff. We can only hope that such institutions will now also accept the recommendations from the Financial Stability Board that further internal guidelines and enforcement are both desirable and necessary.