Market-makers encouraged to review last look

Market-makers who use last look are being encouraged to review the practice to see if they can withstand further regulatory – and potentially legal – scrutiny, according to two legal experts who participated in a January 12 webinar hosted by the Foreign Exchange Professionals Association (FXPA).

The advice comes on the heels of the $150 million fine imposed on Barclays by the New York State Department of Financial Services in November, to settle allegations the bank used last look to boost its bottom line between 2009 and 2014, and that it purposefully misinformed customers of the reasons why their trades were rejected.

The concern among corporate legal teams is that now regulators have found a way in, law-enforcement officials such as the US Department of Justice (DoJ) will not be far behind with their efforts to secure a victory for their side.

"You should expect Barclays is not a one-off, and there is more to come and more in the pipeline," says Jason Weinstein, a partner at Steptoe & Johnson. "You should expect very strong interest from the DoJ and federal law-enforcement agencies in last look practices by financial institutions. You can count on the fact they are looking into this and they will continue to devote attention to it."

With this looming threat of investigation, Weinstein says institutions with last look programmes should look carefully at how they work, what they tell customers about the way they operate, and ensure compliance procedures are sufficient to identify a problem and deal with it before law enforcement is involved.

"It is extra important to make sure financial institutions get in front of any problem that is going on within their institution, that they understand it and they have an opportunity to deal with it before a regulator or law-enforcement agent comes knocking with a subpoena or an investigative demand," he says.

There is a widely held body of opinion that the rationale for using last look systems is still viable and real – Michael Miller, Steptoe & Johnson

Last look is a technique used by market-makers to review and reject a trade within a certain timeframe to protect themselves from sudden price moves. To some in the FX markets, last look is a villain, but this was not always the case. The practice was originally meant to be used as a risk management tool during the days of voice trading, but with the increasing popularity of e-trading it became a profit-maximising tactic. With the global financial landscape changing, participants are beginning to assess the role of last look in currency markets.

"The Barclays decision does not seem to require the elimination of last look systems," says Michael Miller, a partner at Steptoe & Johnson. "There is a widely held body of opinion that the rationale for using last look systems is still viable and real, and that it will remain so until market-makers have the capacity to make instantaneous calls on market value with the same speed and visibility as some of the folks who trade through those platforms."

Until there is a decision on the future of last look, Miller urges market-makers to step back and determine whether their systems, as they are currently structured, have outlived their original, fair-minded purpose. "Can it continue to serve its original purpose with modest tweaks?" he asks.

"The key point is conduct that may have had a perfectly good rationale, that has the intention to end up advantaging the house in a manner the regulators conclude is unfair, regardless of how well-intentioned those practices were at the start, can attract a lot of regulatory attention, expensive settlements and civil litigation," Miller adds.