How Banks Continue FX Rigging Right Under The SEC's Noses

The good news is that the rigging of the FX markets - now conspiracy fact, not conspiracy theory - has, according to Bloomberg, forced the world’s biggest banks to overhaul how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation with the "modernization of processes that probably should have been brought in 15 or 20 years ago." However, the FX market is far from 'clean' as Bloomberg notes, while banks can limit access to details about client orders on their computer systems, they can’t keep employees from talking to one another. Some traders also are still communicating with clients and counterparts at other firms via Snapchat, circumventing their company’s controls right under the nose of the SEC. As one trader commented, "these [reform] changes look like fig leaves."

As Bloomberg reports, positive changes are happening (on the surface)...

The world’s biggest banks are overhauling how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation.

Barclays Plc, Deutsche Bank AG, Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and UBS AG, which together account for 43 percent of foreign-exchange trading by banks, are introducing measures to make it harder for dealers to profit from confidential customer information and take advantage of clients in the largely unregulated $5.3 trillion-a-day currency market, according to people with knowledge of the changes.

Banks have capped what employees can charge for exchanging currencies, limited dealers’ access to information about customer orders, banned the use of online chat rooms and pushed trades onto electronic platforms, according to the people, who asked not to be identified because they weren’t authorized to discuss their firms’ practices.

“This is finally bringing the FX market into the 21st century,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics who specializes in the governance of banks. “What we’re seeing is a modernization of processes that probably should have been brought in 15 or 20 years ago.”

But, beneath the surface, nothing changes...

“The banks are very concerned about what the regulators are going to do, and this makes them look good,” said Colin McLean, founder and chief executive officer of SVM Asset Management Ltd. in Edinburgh, which oversees more than $900 million. “Maybe they think it protects them somewhat from future regulatory changes.”

While banks can limit access to details about client orders on their computer systems, they can’t keep employees from talking to one another. Some traders also are communicating with clients and counterparts at other firms via Snapchat, a mobile-phone application that sends messages that disappear, to circumvent their company’s controls, according to a person with knowledge of the practice.

Not everyone is buying the changes...

“For some of the more naive clients, there is still probably gaming going on by the banks because the incentives are there for doing so,” SVM’s McLean said. “These changes look like fig leaves.”

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