On US election day last November, banking executive David Puth stood in line behind Woody Allen to vote in his Manhattan neighbourhood 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 US 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 behaviour 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 behaviour 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. 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 behaviour 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 behaviour shouldn't now be happening." "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.
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