Broker points – the pips a broker may have to recoup on mis-matched trades – can arise legitimately, but in this case bank traders were alleged to be ‘cashing points’ – executing trades with brokers at loss-making rates for the bank – in return for cash. Traders at JP Morgan Chase, UBS, SG, Dresdner Kleinwort Wasserstein and Israel Discount Bank of New York and brokers at Icap subsidiary Harlow, Tullett Liberty and Tradition were involved in the investigation.
The new guidelines state that the points “are not an appropriate method of dispute resolution”. And: “For some counterparties, in some jurisdictions, the use of points may be contrary to regulatory or supervisory guidance.” When resolving trade-related problems, the Committee advises managers to establish clear policies and procedures, with a transparent audit trail.
The Committee also made reference to dealing with unnamed counterparties – whereby an investment manager trades on behalf of a client without revealing its identity to the dealers. “It is recommended that investment advisers and dealers alike implement measures to eliminate the practice of trading on an unnamed basis,” said the Committee. “Specifically, investment advisers and foreign exchange intermediaries should develop a process to disclose client names to a dealer’s credit, legal and compliance functions prior to the execution of foreign exchange trades. In turn, dealers should establish procedures to ensure the strict confidentiality of the intermediary’s clients and restrict the disclosure of this information to the front office except in the event of a default.”
As foreign exchange is an unregulated industry, the Committee’s guidelines are not enforceable, but banks and institutions in the global industry are expected to adhere to them.
Mark Snyder, chairman of the Committee, reiterated that regulation for the forex industry is not desirable, speaking at the FX Week USA Congress in New York last week.
“Foreign exchange markets are the central nervous system of the global economy. It is up to us to ensure that these markets function in a trustworthy and sustainable manner for the benefit of people all over the world,” he told delegates. Forex should be self-governed, supervised – but not regulated, he said – a situation that is “a great virtue of the currency business as compared with other capital markets”.
In the case of Operation Wooden Nickel, he said, “Fraud is fraud. And no amount of regulation will ever prevent those with criminal intent from breaking the law.”