Kx Systems: ‘fill or kill year’ for Global Code adoption

More than a year and a half since the official launch of the FX Global Code of Conduct in May 2017, a central repository of market participants who have publicly committed to the principles had little more than 600 entries as of December 2018. Only a handful of them are from the buy side.

Adherence to the Code will, once again, come into the spotlight in 2019, as the authors of the document and currency participants place greater focus on its adoption.

But that momentum will need to be backed up by systems that can verify whether a firm is in compliance with acceptable market standards, says Richard Kiel, global head of FX solutions at Kx Systems. This year, it is about making surveillance systems even better at catching would-be bad guys.

“I think there is a growing concern from people on the buy side that maybe things just really haven’t changed. As a technology provider, what we feel strongly about is that principles are extremely important, but in terms of being able to surveil the behaviour of market participants, principles are not enough,” Kiel says.

“You need to balance principles with a sophisticated monitoring platform. Complementing somebody saying ‘I’m a good person and I’m going to do the right thing’ with fact-based evidence to demonstrate they actually are will go a lot further towards restoring the trust between buy and sell side.”

In 2018, Kx Systems saw an uptick in interest across asset classes from businesses as a whole – rather than just compliance units – wanting to take on more surveillance responsibility. John Conneely, head of surveillance at the firm, says businesses are now viewing surveillance as their first line of defence.

One of the most critical points that I think the FX industry is faced with right now is the acquittal of the FX Cartel members

Richard Kiel, Kx Systems

With these kinds of platform in such high demand, plans are already under way to build more intelligent workflows to reduce the number of false positives being received by clients.

“One critical question the FX industry is faced with right now is some of the recent court decisions and whether they are sending a message to the market that, in terms of behaviour, has anything really changed? Is this behaviour still acceptable?” asks Kiel.

“Obviously, the big focus thus far has been around the development of the FX Global Code, which, by design, will continue to be enhanced. The immediate focus is now the adoption and implementation, and what behavioural improvements we are seeing based on evidence provided by actual data and analytics. Improved behaviour on the sell side would be an obvious win, but I think 2019 could really be a fill or kill year for the widespread adoption of the Global Code,” he says.

Benchmark scandal

The driving force behind making these systems better is the very same thing that sparked the creation of the Code: the 2013 news that a number of the world’s largest currency dealing banks had colluded to manipulate benchmark prices, placing the industry under heightened regulatory scrutiny.

As a result of the alleged misconduct, dozens of FX traders were dismissed from their positions at various banks; others have been indicted and/or are being investigated in the US. At least 16 banks have paid out a combined $10 billion in regulatory fines to settle the matter. Investors have collected more than $2 billion in damages, but more civil lawsuits are on the horizon.

In an effort to rebuild trust in the market and stave off regulation, a number of central banks, along with buy- and sell-side market participants, came together to work 55 principles of good behaviour into the Global Code. Regulatory compliance has been among the top-spending items for banks over the last few years as they have brought in more personnel and platforms to identify and stub out bad behaviour.

Cartel case message

A year on from the Code’s publication, the US Department of Justice lost the criminal case against the three former FX Cartel traders, accused of being at the centre of an alleged global conspiracy to fix prices in the now $5.1 trillion-a-day currency market. Jurors acquitted the UK men of the price-fixing charge after nearly three weeks of trial because they believed the US did not have enough evidence to convict them.

“The first thing they are looking for usually is really an audit trail of what happened. A lot of the time we are surprised to see that clients don’t always have a centralised view of the market and reference prices in the context of FX,” Conneely says.

“The second thing we are noticing is that once that is implemented, clients – in the context of surveillance – are often overwhelmed by the amount of alerts being generated. That’s one thing we are going to be focusing on for 2019. We have gone in and helped them build more intelligent workflows so they’re looking at things that really matter in the context of alert and market manipulation,” he adds.