Recent remarks made by UK Chancellor George Osborne squarely addressed manipulation in the forex markets. While the topic was not surprising to anyone, the public and political acknowledgement was greatly needed, and also provided greater clarity to the banking sector, which in recent months has been proactive in tackling alleged FX market abuse by certain individuals, all the while operating in something akin to a regulatory gray area. Generally, across the markets, regulation has been increased, yet FX is something of a ‘final frontier'. But now a clarion call may have been heard. Still, with UK elections on the horizon, a political push is just one side of the coin of addressing market manipulation. Certainly, the vast majority of brokers are taking the alleged FX market abuses very seriously - though in some instances, perhaps too late: around 40 traders have been suspended so far for possible illegal trading. (And the rise in compliance officer hiring is partly indicative of this.) Yet more needs to be done to encourage the regulatory authorities and the private sector to work together hand-in-glove. Flying Below the Regulatory Radar
By value, FX is the largest financial market in the world (despite there being no centralized market) with over $5.3 trillion traded daily (London itself makes up 40 percent of this market). It's commonly voiced how surprising it is that FX has managed to fly below the regulatory radar for so long. While regulations arising from the 2009 G20 meeting in Pittsburgh, such as Dodd-Frank and EMIR, appeared to bring some FX contracts into the regulatory tent; others, such as swaps and forwards, were specifically taken out-of-scope of Dodd-Frank by the US Treasury. The situation under EMIR is still being clarified, but should be finalized within months. With no central exchange, FX has largely escaped regulation to date, partly because the lack of readily accessible order and execution data makes it so hard to police. However, financial institutions around the world are seeking to rebuild reputations along with balance sheets, so, irrespective of specific regulation, management wants assurance that traders are doing "the right thing" in spirit as much as letter. Keep in mind that even in the absence of specific product regulations, in the UK for example the FCA's Principles require a regulated firm to conduct its affairs with integrity, and observe proper standards of market conduct as the firm can be held accountable for breaches of the Principles as much as specific regulations. Further, some countries are pursuing actions in the FX market based on alleged breaches of competition laws, rather than market regulation. Technology Creates Opportunity
On a positive note, technologies have been developed to look at activity, not only during a fixing event, but before and after as well, and which can be customized to suit the bank's business. (Disclaimer: we recently finished creating an FX solution that we co-developed with six major banks; this is one sign of the private sector's proactive efforts on this matter.) If an alert is triggered, the compliance officer will better be able to better target their investigation, and be able to see the affected trading in the wider context of the market at the time, and over time. This means that if there has been wrongdoing, they will be able to react faster. There can be little doubt that pure politics dictates that "something is done." Being able to quickly find wrongdoing—and help demonstrate where there is none—is essential to restoring public trust. The Chancellor's speech was a step in the right direction, a direction the financial sector is eager to follow.
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