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CHECKS & BAL­ANCES

Banks crack down af­ter global scan­dal costs them bil­lions

- Business · Finance · Big Brother 2007 · Switzerland · Adrian · BNP Paribas · London · Federal Reserve System · New York City · The Bank of New York Company Incorporated · Potter · Zug · The Vanguard Group · Vanguard Investments Australia Ltd · New York Federal Reserve Bank

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.

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 ?? Pic­ture: Reuters/Mark Blinch ?? Banks have in­tro­duced Big-Brother-style sur­veil­lance aimed at curb­ing cur­rency-trader mis­con­duct.
Pic­ture: Reuters/Mark Blinch Banks have in­tro­duced Big-Brother-style sur­veil­lance aimed at curb­ing cur­rency-trader mis­con­duct.

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