Foreign Exchange | Capital Markets

How to take the gaming instinct out of foreign exchange traders has become the order of the day, following last month’s imposition of $4.3 billion in fines on six global banks for manipulating currency benchmarks.

In the UK, the center of the FX market, the Financial Conduct Authority blamed “ineffective controls at the banks” for allowing traders to put their banks’ interests ahead of those of their clients, other market participants and the UK financial system. “The banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct,” the FCA says. “These failings allowed traders at those banks to behave unacceptably.” The FCA announced an industrywide remediation program “to get at the root causes” of the problem. It said it would require senior management of the banks to take responsibility for delivering the necessary changes. Clive Adamson, the FCA’s director of supervision, says: “The supervisory changes that we are announcing will help make sure that real cultural change is delivered across the industry and that senior management take responsibility for ensuring the highest standards of integrity operate across all of their businesses.”

Traders at different banks formed tight-knit groups in which information was shared about client activity, including using code names to identify clients, the FCA said. “Traders shared the information obtained through these groups to help them work out their trading strategies,” it said. “It is clear from our findings [from a 13-month investigation] that there has been widespread poor practice in the spot FX market.”

Marshall Bailey, president of ACI Financial Markets Association, which represents market participants globally, says: “Ultimately, it came down to the behavior of individual market participants and the ability of their supervisors to enforce the standards required through oversight and governance.” He says this should not be seen to reflect the broader health of the FX industry, nor should it trigger wider structural reforms.

Harmonizing the rules, guidelines and conduct expected of market participants across borders is imperative, Bailey says, in order to stamp out unethical behavior.

David Gilmore, partner and economist at Foreign Exchange Analytics, notes: “The FX manipulation investigation has had a very limited impact on volume and volatility, as far as I can tell. It has changed the way banks behave in making markets, turning from informal forms of behavior and ethics to very formal ones.”

The investigation has also changed how people in the market communicate, Gilmore says. They now use more formal channels and are more conscious of their interactions, whether via chat rooms, email or phone conversations, he says.