Banks told to sign up to forex deal or be shunned

The Australian 12:00am July 17, 2017

David Rogers, Andrew White

Banks that fail to sign up to a new global code of conduct for the $6.6-trillion-a-day foreign exchange market will be barred from dealing with central banks as well as with other signatories to the voluntary code, according to the man who spearheaded its development, Reserve Bank deputy governor Guy Debelle.

In an exclusive interview with The Australian, Mr Debelle said he was confident banks had begun improving their behaviour, even before the code came into effect, and that the dark days since the global financial crisis were over.

“The main message is ... that the code is out there now and we expect people in the market to start adhering to it pretty shortly and sign up to the statement of commitment,” he said.

“But I would say the behaviour started to improve even a couple of years ago. That doesn’t mean it’s across the board, but in the past there wasn’t a common understanding of what was good ­practice.”

As the former chairman of the Bank for International Settlements FX working group, Mr Debelle has led the central bank push to repair the damage to the public’s confidence in the industry after widespread misconduct by global forex participants that’s cost them more than $13 billion in fines.

Commonwealth Bank, Westpac, ANZ and National Australia Bank have all faced regulatory action including multi-million-dollar fines for problems in their foreign exchange businesses, including traders “frontrunning” client trades for their personal accounts.

Just days before the code was unveiled on May 25, Macquarie Group was hit with an enforceable undertaking from the Australian Securities & Investments Commission from an investigation that revealed staff disclosing confidential information to third parties on client trades and their identities. The conduct ran from 2008 to 2013.

So far the signs are good. Westpac, Citi and XTX Markets are among major players in the global FX market that have already signed up to the code, which requires them to be “both ethical and professional”, have “robust and clear policies” to protect confidential information, and promote “a strong, fair, open, liquid and appropriately transparent foreign exchange market”.

All of the large sell-side institutions including Goldman Sachs, Morgan Stanley, JPMorgan, Deutsche Bank, Barclays and the major local banks have indicated they will sign up.

Underlining interest in the event, players are jetting in from New York, Singapore, Tokyo and Hong Kong for an event in Sydney this week to hear Mr Debelle discuss the code at bank prime broker Invast Global. Attendees also include NAB, ANZ, Westpac, Macquarie, the Future Fund, some international banks, ASIC and number of fund managers and brokers.

“It will take people a bit of time to check that they are fully compliant,” Dr Debelle said.

“But certainly they will need to sign up within 12 months, otherwise we — as central banks — will stop dealing with them, and there is some chance that other counterparties will follow suit.

“In the past, if I decided I’m going to stop trading with you and take my business somewhere else, there was a fair chance that somewhere else would do exactly the same thing, so it wouldn’t achieve much.

“A reasonable expectation we have is that now it’s a credible threat to say, ‘I’m going to take my business to someone who will treat me appropriately’.

“So to some extent, the more people we have signing up to this, then if (you don’t) you’re very much on the outer.”

As well as the threat of a loss of business from counterparties refusing to deal with those who don’t sign up for the FX GCC, non-compliant market participants face reputational damage.

“To some extent that could see some negative publicity because they won’t be on a foreign exchange committee anywhere in the world either,” Mr Debelle said.

“It’s not regulation, but there are non-trivial commercial and reputational consequences.”

As well as guiding the behaviour of participants, the code is intended to help restore the confidence of businesses — and particularly smaller companies — that they will be treated fairly in the global FX market. With large chunks of the nation’s $2 trillion superannuation assets invested offshore investors need to be able to do large cross-border deals.

“It’s the financial plumbing of the global economy, so you need to have confidence that it works properly.

“If I’m a corporate wanting to hedge my FX exposure, I want to have the confidence that it’s going to be done appropriately.

“Otherwise I stop hedging, and that’s doesn’t help my business.”

In his view, in many ways the problems of the past were due to a lack of guidance from officials. By showing the industry in a rational way what needed to happen to protect the integrity of the industry, participants had been quite eager to do something about it, he said.

“There was some stuff that everyone knew was bad — not that it stopped that from happening — but in terms of what’s appropriate when you are handling an order, there wasn’t universal agreement.”

A fair amount of activity in the FX market fits into a “grey area”.

Frontrunning client orders, inappropriately handling client stop-loss orders or inappropriately sharing information on orders clearly fit in the “black” area of conduct.

But “pre-hedging” client orders — by drip feeding orders into the market, for example — could be conflated with frontrunning, according to Mr Debelle.

“We are more saying in what circumstances is this sort of behaviour appropriate and what you’ve got to tell your client, so the client knows how you’re going to treat it,” Dr Debelle said.

As for the proliferation of cryptocurrencies like Bitcoin, Dr Debelle doesn’t see anything to threaten the ascendancy of the traditional FX market at this stage.

“I would have a hell of a lot less trust in any cryptocurrency, because that means trusting that it’s going to preserve value, and in some of them the price volatility has been huge.

“For something that’s apparently unhackable, a couple have been hacked in the past couple of months, so I don’t know how much confidence I would have in them being a store of value.”

In his view the conduct of monetary policy isn’t threatened by cryptocurrencies either.

“To some extent we already have electronic money in the sense that the balances that the banks have with us to clear everything across their accounts — they are all electronic — so the technology of distributed ledger is not massively different from what we have.

“It’s certainly something the central bank community is thinking about, but it’s mostly a fairly modest technological upgrade of stuff we have.”