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FX remediation programme: your next steps in system design

Updated: Oct 24, 2022

Last month the UK financial regulator published its outline for next steps in the industry wide FX remediation programme which now expands to firms who were not involved in the initial exercise to implement steps appropriate for their business.

It comes as no surprise then, that the rigour applied to controls and checks on behaviours looks very similar to initial rounds of this exercise.

From a business perspective – this includes:

  • front office culture and recruitment policy

  • the risk and control environment relating to day to day trading activity

  • compliance, audit and risk functions

  • financial incentives, performance management and training

  • communications monitoring

  • conflicts of interest management

  • benchmarks

From a behaviour, breaches and conflicts perspective this covers:

  • attempting to manipulate or control fixes

  • misleading clients by implying they are getting the best rate, when in fact the rate they received may have included a significant 'hard mark-up'

  • engaging in coordinated trading to gain an unfair advantage

  • performing partial fills of client orders but not passing to the client the correct fill

  • using 'layering' or 'wash trades'

  • deliberately triggering client stop loss orders

  • front running

  • sharing confidential information with clients and traders at other firms

  • unfairly assigning clients the worst rate available in relation to 'transaction window' trading

  • inappropriately using personal dealing accounts, including spread betting

So how does a firm go about preparing for such an exercise and, more relevant to my conversation, what are the system design learnings here?

Below are some observations from being involved in an FX remediation project which I believe has some relevance to other regulatory projects.

First and foremost, bring the right people to the party.

The first list above (business perspective) highlights some key players namely, desk heads and business managers, first and second lines of defence and IT (Project Managers).

Some others secondary players, you might say (e.g. audit and HR) will dip in and out as required and a fresh pair of eyes who can join the dots without a vested interest in any business area could be useful in realising synergies.

But surely input isn’t confined to the above and doesn’t stop there – especially if any of the below scenarios/questions resonate:

  • Do any of the surveillance projects require data (structured or otherwise) to be pooled for analysis?

  • Are there other projects already in flight?

  • Are there multiple platforms for capturing front end trades? Do these all flow into one place? Who knows about this data?

Much of the communication surveillance theme (project) in early days could be standing back with pen and paper and understanding what you have before deciding what you want to do with it.

A good programme manager will realise these ‘outer-ring connections’ and identify project dependencies. A really good programme manager will be thinking about cross theme (team) benefits (e.g. could a data project over there benefit a conflict management project here).

This can be as much of a people management exercise as 'a get stuff done' task and while you want all of the right people around the table, you also need to keep it manageable.

Think collaboratively and think beyond the status quo, which should come naturally if you’ve got the right minds working together.

In terms of individual business areas:

  • The business knows better than most how the market was being rigged and how it could be going forward.

  • First and second lines (Compliance monitoring and advisory) will know about potential gaps in surveillance.

  • Desk heads will be well aware of risk taking and limits.

Everyone will no doubt know their respective business areas and applicable work streams, but it's sometimes worth hearing the detail other teams encounter when dealing with your area.

It could be worth considering the FCA’s concerns (the second list above, behaviour, breaches and conflicts) collectively to bring out valuable contribution from all quarters. The gaps in current surveillance systems could be from poor data going in which only the business knows about. Routinely bypassing controls could come from a legacy understanding of (i.e. culture) of ‘the way the business works’. If it smells wrong, then colleagues around that table should be calling it out.

A message or steer from the top to make it a misdemeanor/transgression to front run or collude ahead of a fix could be the starting point, embodied through procedures and policy documents which underpin surveillance and monitoring.

Maybe just checking communications around the fix is not enough? Maybe looking closely at how much 'prop' business is done in certain currency pairs, in light of pending fix orders in conjunction with voice data is more clearly indicative? It has become the norm for many surveillance systems to run market data against trade data which is a good place to start, but what about the meta data items (e.g. client type data?)

In their closing comments, the FCA gave away some great cross asset uses of data:

"Whilst not relevant to every FX business, a number of positive mitigation steps were observed, including firms that:

  • proactively extended the principles of 'best execution' to their FX business where applicable

  • applied the lessons learned from their FX remediation work to their other business areas

  • introduced pricing matrices, setting clear parameters for FX sales staff when applying hard mark-ups to client orders

  • segregated fixing activity within their FX trading business"

The first two points above are great examples of how you can harvest your data in house and quite easily when looking for any potential wrong doings.

Finally, in addressing this exercise from a surveillance perspective, there is always a risk of ‘outsourcing the problem’ if you call in vendors in the hope they will provide a surveillance solution to oversee FX business and keep you in the clear.

This was a problem caused by poor market practices which were allowed to continue and flourish for too long.

Perhaps an ethical question to ask is going forward is "just how are you making your profits?"

The right message from the top, coupled with procedures and tools could serve as a more powerful and permanent shift in culture where the problem is owned and not outsourced.

Full details of the next steps announced by the FCA for their FX remediation programme can be found here:

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