FX: Lessons from the fix
It’s time to get some perspective back into the debate about global foreign exchange.
The multi-billion dollar fines handed out by a group of international regulators to banks because of their traders’ collaborative efforts to manipulate the 4pm London fix have prompted yet another outpouring of vitriol from the usual sources about what’s wrong with the banking industry.
The banks fined deserve their punishment. They employed traders that worked together to distort free markets. The buck for that collusion stops with them. But it’s time to get some perspective back into the debate.
Two of the trades highlighted by the UK’s Financial Conduct Authority showed Citi and HSBC making profits from their traders’ manipulation of $99,000 and $162,000 respectively. These are big sums, and if multiplied would mean big profits.
But they remain a drop in the ocean to the annual profits – in the region of $2 billion a year – that the FX divisions of these two leading global players generate. That tells you the motivation for the abusive trades was more to do with individual traders’ own profits and bonuses, not to mention their egos, rather than a senior-level corporate conspiracy to manipulate the markets for additional revenues.
It’s also time to remind those accusing the FX market’s leading players of systematically ripping off their clients that foreign exchange is the most client-friendly of all financial markets. In FX, you can always get a price. That’s something that bond investors would love to have. They, and their equity counterparts, also look enviously at the way FX clients are quoted margins on trading usually priced to fractions of a basis point. Let’s not forget the role that the clients themselves played in the fix debacle. Banks have always said they don’t like the 4pm fix – this is not a post-fact complaint. They provided it because clients wanted it. But those clients – often the world’s biggest fund managers – were the ones doing their own clients a disservice by using the fix.
Rather than time their trades during the day for the best price and execution, these fund managers wanted the ease of a daily fix to fulfil their fiduciary duty to the letter, if not the spirit, of getting their own clients the best price.
One final point: the market owes Deutsche Bank an apology. When the fix investigation was announced, it was widely speculated by its competitors that Deutsche – the largest FX bank over the past decade – would be one of the worst offenders. Deutsche, of course, through a series of reprimands, has earned a reputation for sometimes sailing close to the wind in its securities business. Some even speculated that a big fine for Deutsche’s FX business would lead to calls for the resignation of the bank’s co-CEO, Anshu Jain, because for much of the past decade the division was ultimately his responsibility.
When the initial round of fines was announced, Deutsche’s name was noticeably absent. The speculation continued: Deutsche, like Barclays, had not been able to reach an agreement with regulators and its fine would be later, and heavier, than the first few banks. But the FCA has told Deutsche that it does not plan to take any enforcement action against the German bank. That doesn’t mean Deutsche comes out unscathed in the FX division just yet. Investigations in the US and Germany into more general foreign exchange practices are not over.
But for now, Deutsche is the one leading global FX house with a clean bill of health. Jain should thank those running the business for keeping the German bank’s name out of the mire. Although the handful of traders and salespeople suspended by Deutsche after the official investigations were announced might be waiting for their own call from the bank’s managers and HR department.