Buyer beware: the FX code has not gone far enough

New standards for currency dealers have brought some big improvements, but many practices remain hazy

When a client wants to execute a foreign exchange trade with Bank of America Merrill Lynch – accepting a quote provided by the bank – it should be prepared for its order to be delayed by up to 50 milliseconds before it is accepted. At BNP Paribas, the typical all-in time for a trade to be accepted is between 10 and 150 milliseconds. Goldman Sachs, at its discretion, will apply a ‘speed bump’ of 200 milliseconds to a client. Standard Chartered rejects all trades if they exceed a certain time threshold.

During this lag, the market price could move relative to the pending trade, either helping or hurting the client. Again, bank practices vary.

At Deutsche Bank, the default treatment of these price moves is asymmetric, so fewer trades will be accepted when the price moves against the bank than when the price moves against the customer. Deutsche argues this allows it to provide “deeper, more consistent liquidity” but gives clients the chance to opt for three alternative approaches, including one that is symmetric. Societe Generale’s policy is to be symmetric by default, but it reserves the right to treat price moves asymmetrically under certain conditions. Other banks always apply a symmetric approach.

These are examples of the spread of practices revealed by a analysis of 15 banks’ forex dealing disclosures, many of which have been reviewed and updated following the publication of the market’s new global code of conduct last year (a table of the results is available here).

From the client’s perspective, those changes have done some good. Most of the banks now state they will not pre-hedge during the period when they carry out checks on a trade request – known as the last-look window. This practice is barred under the code, except in cases where a dealer is trading on an agency basis.

But not all of the banks have yet made that commitment public. And their stance on pre-trade delays and the treatment of price moves can be strikingly different.

Some argue this is OK. The point of the code was to improve communication between dealers and clients, to make the dealing terms clear, argue industry lobbyists – it was not an attempt to standardise practices at this level of granularity.

What is the threshold beyond which a pre-acceptance price move will see the trade rejected?

But the banks’ disclosures are a one-way form of communication. Only the biggest clients will have the chance to question the bank, to clarify its stance, to request changes. For the rest, the documents are a take-it-or-leave-it statement of policy, which many will never read: one forex trading head describes it as a “buyer-beware situation”. A client may instead describe it as a “cover-your-arse situation”.

And the disclosures raise plenty of questions. Under what conditions do banks apply additional hold times on top of their last-look checks? Will clients be informed when a hold time is applied? What is the threshold beyond which a pre-acceptance price move will see the trade rejected? Some banks offer limited clarity on some of these points; a couple invite clients to get in touch if they want more.

Here’s another question: banks say they do not pre-hedge trades during the last-look window, but does that policy extend to the delays and ‘speedbumps’ that can be added on top of those checks? Presumably it does – any other answer would seem to breach the spirit of the code – but at the moment, it’s just not clear. And clarity was, apparently, the point.

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