"It has been a nightmare," said Thomas Wind, head of foreign-exchange and trading at Woodman Asset Management in Zug, Switzerland. "No one can do anything.''
After Wind sent a news article via instant message to a friend in Asia, the compliance department from the friend's bank contacted him about violating rules, he said. Wind argued that sending a publicly available news story had to be above board. The compliance people said they'd continue to monitor the chat.
Electronic sleuths are also scrutinizing trading records, scanning for any unusual transaction sizes, suspicious timing or abnormal prices, said Steve LoGalbo, a director at NICE Actimize, which makes compliance, risk and financial crime software.
The snooping comes after the exposure of price-rigging shook the industry and prompted sweeping cleanup efforts by regulators and foreign-exchange executives. The three ex-traders -- Richard Usher, formerly of JPMorgan Chase; Chris Ashton, previously at Barclays; and Rohan Ramchandani who was at Citigroup -- are charged with conspiring to fix the market while participating in an electronic chat room known as "the Cartel."
Banks' broker-dealer divisions spent about $2.3 billion on compliance from 2014 to 2017, with surveillance accounting for about half of that, according to an estimate from Danielle Tierney, a senior analyst at Boston-based Aite Group.
Trader misbehaviour has "opened the eyes of a lot of buy-side participants to be very cautious and wary" when dealing with banks, said Andy Maack, Vanguard Group's global head of foreign exchange trading.
Two years ago, after Maack criticized a controversial practice, called last look, that allows dealers to back out of losing trades, several met with him and pledged to change the way they handled orders.
"The pendulum always swings, and swings hard, the other way after periods of scandals and fines," Maack said.
Some financial firms are taking fingerprints to prevent financial crimes, and several banks have moved front-office staff into risk departments to police their ex-colleagues, according to the currency traders who asked not to be identified. Some bankers say they avoid meeting socially to prevent the appearance of collusion. Even jokes are discouraged.
For Adrian Boehler, global co-head of FX local markets and commodity derivatives at BNP Paribas, bolstering standards has become a "commercial opportunity." The bank, which agreed to pay $686 million over the past two years for misconduct, now segregates order information and automates some trades to avoid conflicts of interest.
Boehler works in London under the Financial Conduct Authority's Senior Managers Regime, which "makes me personally liable for anything untoward that happens on my watch," he said at a conference in February. "Consequently, I sleep much better at night knowing that I have embedded in the first line of defence, i.e., embedded in the business, a surveillance mechanism which gives me feedback from the front line."
At the Federal Reserve Bank of New York, audit and compliance teams are "pretty tough," said Simon Potter, head of its markets group. The bank's operations are reviewed by independent risk teams, separate from the trading desk, forming a second line of defence against misconduct, Potter said. Companies that sit on the foreign exchange committee overseen by the New York Fed also have a similar setup, Potter said at a July conference.
Potter is steering an effort to overhaul standards and rebuild trust in the currency market, which is mostly over-the-counter, spans the globe and doesn't fit neatly under the authority of any single regulator.
Despite the cleanup effort, there are still concerns about routine misbehaviour, particularly around the controversial practices of last look and front-running.
The zero-tolerance approach among many industry executives means that FX staff have to accept heightened scrutiny if they want to stay in the business. Some market participants complain that the tactics used are inefficient and ineffective.
"Only when traders see that they can go to jail will they improve their behaviour," said Mayra Rodriguez Valladares, a former foreign-exchange analyst for the New York Fed, who conducts training for bankers and regulators via her consulting firm MRV Associates Inc.
Banks are starting to find other uses for their surveillance software, according to LoGalbo at NICE Actimize. They're using it to listen for trending topics in conversations among personnel and clients that might help to sell financial products.
"Now you can look for real business opportunities and leverage all this compliance data for other reasons," he said.
- Bloomberg
