To those following the well-publicized Libor scandal and, more recently, allegations of currency markets manipulation, a newly published review of the way these markets operate is welcome news. The U.K. Treasury, the Bank of England and regulatory body Financial Conduct Authority’s Fair and Effective Financial Markets Review focuses on three major wholesale markets: fixed income, currency and commodities. These wholesale markets help companies manage risk, allocate capital and essentially drive the economy. The review addresses concerns surrounding market misconduct and focuses on how to improve market oversight. In a speech coinciding with the announcement, George Osborne, head of the Treasury, promised that new, stricter criminal sanctions — perhaps as much as seven years in jail — will apply to foreign exchange trading misconduct, building on recent legislation around similar penalties for Libor manipulation.
The implications for Asia of increased oversight in Europe are huge. Wholesale markets are global in nature, although London plays an outsize role. The U.K. accounts for 41 percent of global foreign exchange trading, according to the most recent survey by the Bank for International Settlements. Despite this, wholesale markets in Asia cannot be excluded from Europe’s push for a market overhaul. By contrast, Asia has largely been spared many of the key tenets from other recent regulatory measures such as the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the 2012 European Market Infrastructure Regulation (EMIR), which are naturally focused on domestic markets.
We are already seeing pressure from some regulators in Asia to force banks to review their currency trading operations. If recent actions in Europe are anything to go by — more than 40 traders have been suspended thus far for possible currency trading misconduct, and at least nine firms have been fined a total of more than $6 billion in connection with Libor manipulation — then banks across Asia will need to be proactive and move quickly. For some, it’s already too late. UBS’s Japanese securities arm pleaded guilty to U.S. fraud charges and was fined $100 million by the U.S. Department of Justice for its part in Libor manipulation. More recently, a former Rabobank trader based in Tokyo pleaded guilty for his role in manipulation that cost the firm more than $1 billion in fines and led the chair of the institution to step down.
Because of the wholesale markets’ cross-border reach and perhaps also because of their gigantic market turnover, worth trillions of U.S. dollars a day, global regulators are coordinating their efforts. Major regulators in Asia are in closer lockstep with their counterparts in Europe and the U.S. than in the past, both in focus and timing, and regional regulators are taking proactive steps. The Hong Kong Monetary Authority late last year was the first Asian regulator to look into forex trading misconduct, forcing several banks to conduct reviews of their trading operations. In a similar vein, the Monetary Authority of Singapore is investigating local banks for possible violations, having found evidence of traders’ collaborating around currency-fixing windows. In March the Australian Securities and Investments Commission announced it will be running a review into forex manipulation in Australia. The New Zealand Commerce Commission announced its own forex trading investigation in April.
There has also been some emphasis by watchdogs on emerging-markets currencies as being more susceptible to manipulation, with reports that some currency pairs in Asia such as the Singapore dollar and South Korean won have come under particular regulatory scrutiny. Although together they account for a fraction of total market turnover, the theory is that smaller daily volumes in emerging-markets currencies may make it easier to move these currency pairs compared with more liquid ones. For some emerging-markets currencies, volatility during fixings can be more than 10 times that of a major currency pair.
The good news is that market participants themselves have made moves alongside or, in some cases, ahead of the regulators. Recently, Nasdaq OMX’s SMARTS surveillance and compliance team has worked with six major banks to develop a forex trading surveillance system to monitor, among other behaviors, manipulation around fixing windows, covering both spot trading and nondeliverable forward markets.
Global regulators’ renewed focus on wholesale markets oversight stands to put market watchers everywhere at ease. But it is particularly good news for Asia that regulators across the region are in line with Europe’s push for fairer markets. Regulators and banks across Asia need to take a forward-thinking approach to monitoring trading activity and, in doing so, improve the fairness and efficiency of these major markets that affect everything from exports to mortgages and beyond.
Michael Karbouris is head of business development, Asia-Pacific, at Nasdaq OMX in Hong Kong.
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