Finance and Economics
Foreign Exchange Trading: Be good, or else
A new code of conduct aims to clean up a tonish market.
Financial market traders have earned a pretty shocking reputation in recent years.
From manipulating LIBOR, a benchmark interest rate, to rigging the daily fix of foreign-exchange (FX) rates, traders have shown themselves ready not just to stretch the rules, but to collude in outright illegality.
A global code of conduct for the FX market, unveiled on May 25th, aims to put things on a sounder footing.
Drawn up over the past two years by a coalition of central bankers, known as the FX Working Group (FXWG) , and supported by a panel of industry participants, the code's 55 principles lay down international standards on a range of practices, from the handling of confidential information to the pricing and settlement of deals.
Such standards seem long overdue in the massive FX market.
Roughly $5trn is traded every day.
Many companies, pension funds and money managers depend on banks to hedge their exposure to currency fluctuations.
Yet in the past traders colluded with one another in internet chat rooms, secretly swapping client data in order to rig the widely used WM/Reuters benchmark exchange rates.
Some were caught and fired.
Banks such as Citigroup, HSBC, JPMorgan Chase, Royal Bank of Scotland and UBS paid billions of dollars in fines.
The FX market has always been lightly regulated, but many countries do have codes of conduct, usually drafted by the central bank in consultation with market participants.
Often, however, the codes were defective: they missed areas vulnerable to malpractice; and were rarely updated, scantily enforced and widely flouted.
The new code starts with some advantages.
It will supersede the national codes, and provide a single global set of principles, with adherence closely monitored by a newly formed committee of central bankers and trading institutions.