Banks and funds will
never quite be forex friends
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[May 25, 2017]
By Patrick Graham
(Reuters) - On U.S. election day last November, banking executive David
Puth stood in line behind Woody Allen to vote in his Manhattan
neighborhood and then got on a plane to be shouted at for the rest of
the day by a group of rich fund managers.
"It was hostile," he says. "They were really angry about how some
counterparties behave. I said: 'So why do you have a relationship with
them if you don't trust them?'"
It's a story Puth, head of U.S. settlement bank CLS, has been telling
privately as he and other leading lights in the global currency trade
seek backing for a code of conduct aimed at reviving faith in the
world's biggest financial market.
They hope it will make what is essentially an unregulated marketplace
more transparent, but are also honest that it may not put an end to
behavior that has been part and parcel of currency trading as long as
anyone can remember.
Neither is it likely to prevent the relationship between banks and their
clients sinking sometimes into acrimony as they compete for the billions
in profit the market generates.
"There is no way in which if someone deliberately wants to take
advantage of a system or a situation, that we can prevent that," Puth,
head of the market participants body which worked on the code, said in
an interview last week before its launch.
"(However) I believe that the Code raises the odds that unethical
behavior will be rooted out and shut down quickly."
Regulators and leading financial firms launched the new code of conduct
for global currency trading on Thursday.
Both Puth and Australian central banker Guy Debelle, who has won the
respect of senior bankers for leading global work on currency regulation
over the past three years, are frank about the limits of what they have
tried to achieve.
The code includes "high level principles" for how people should act
rather than actual rules.
British regulators are expected to link it to their senior managers'
regime for financial firms, meaning bankers and others can be held
personally responsible for breaches, and Debelle says others - including
Australia - will follow suit.
But some jurisdictions may not and there is an essential flaw in the
plan: the FX market is still dominated by over-the-counter off-exchange
trade which takes place directly between banks and their clients, rather
than, for example, on an independently monitored stock exchange.
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U.S. dollar and Euro bank notes are photographed in Frankfurt,
Germany, in this illustration picture taken May 7, 2017. Picture
taken May 7, 2017. REUTERS/Kai Pfaffenbach/Illustration
At crunch moments that means that the price is a matter of argument
between the bank, who is broking thousands of trades for different
clients while holding its own exposure, and individual customers, who
have to assess whether the price they got was fair without knowing what
other trades the bank did.
Exhibit A in this regard is the Swiss franc's spectacular surge on Jan.
15, 2015, which market participants say left some banks and their
clients at loggerheads for weeks over the prices at which
prior-established "stop-loss" trades were executed.
"In any industry this sort of event would have been messy," says Debelle.
"And it was."
The clearest public evidence of day-to-day abuse of the relationship is
the row over bank dealers' sharing of client order details to rig daily
currency fixings, for which seven major lenders were fined $10 billion
two years ago.
Many bank dealers defend the behavior of those involved by arguing that
they were responding to aggressive gaming of the market by hedge funds,
who are even less regulated.
Debelle insists the code should provide enough clarity on how banks are
supposed to behave to prevent such systematic abuse.
"It would be surprising if the market was cleaned up completely," says
Debelle. "But the fixing (rigging) was happening in fairly benign
conditions. In normal times, that sort of behavior shouldn't now be
"What we can say is that the market is fully aware of the situation it
was in a few years back and the need to do something about that. That
was evident from this process. They have all devoted a lot of time and
energy to it."
(Editing by Toby Chopra)
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