CHECKS & BALANCES
Banks crack down after global scandal costs them billions
It’s Big Brother for banks after billions in penalties
● After a global scandal that cost them $14bn in fines and settlements, banks are taking no chances — they’re even cracking down on currency traders for offences as minor as uttering the f-word on the phone.
The pendulum has swung away from the relatively permissive environment of earlier this decade, when traders allegedly manipulated prices, front-ran clients and abandoned unprofitable trades — actions that put their interests before those of customers.
Traders today are subject to 24-hour Big Brother-style surveillance that goes beyond the scrutiny of equity and bond desks. It uses machine learning and artificial intelligence to lurk in chatrooms, listen in on phone conversations and flag anything that might carry the whiff of criminal or abusive practices.
The clampdown was described by more than a dozen industry participants who requested anonymity because they weren’t authorised to speak publicly.
“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 was above board.
Electronic sleuths are also scrutinising 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.
Banks’ broker-dealer divisions spent about $2.3bn 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 Bostonbased 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 criticised 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.
It has been a nightmare. No one can do anything Thomas Wood Head of foreign exchange and trading at Woodman Asset Management in Zug, Switzerland
“The pendulum always swings, and swings hard, the other way after periods of scandals and fines,” Maack said.
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 $686m 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 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.
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 means that FX staff have to accept heightened scrutiny if they want to stay in the business.
“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.