Sideways: The Committee to abolish Christmas trades
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Sideways: The Committee to abolish Christmas trades

When HSBC’s former head of global FX cash trading Mark Johnson learned that he had a window of just over 30 minutes to move the sterling exchange rate and profit from an approaching client trade, he said: “Ohhh f***ing Christmas,” according to US prosecutors.

The implication in the US case against Johnson is that he knew he had an opportunity to profit from front-running the order by Cairn Energy to convert $3.5 billion into sterling ahead of the agreed transaction time at the 3pm London FX fixing.

The case against Johnson and his former deputy Stuart Scott has weaknesses. But a newly aggressive approach by US prosecutors towards sharp practices in fixed income markets could hamper the ability of dealers to profit from execution of client trades, regardless of the outcome of a trial.

One of the positions Johnson is accused of taking to exploit the Cairn order in 2011 was a sterling/euro trade that was unwound for a profit on the day of the core sterling/dollar deal by the client. This was presumably designed to anticipate the boost that a big sterling purchase against dollars could also have on sterling’s exchange rate against the euro.

The Volcker Rule restricting proprietary dealing by banks came into effect in the US last year; similar regulations are being implemented in Europe. There is still confusion over the scope for banks to profit from hedges, however.

The case against Johnson and Scott raises the stakes for a committee that was set up by the industry to restore confidence in the fixed income markets after a series of scandals, such as Libor manipulation.

The Fixed Income, Currencies and Commodities Markets Standards Board (FMSB) published its first standard for improved conduct at the end of June, a year after it was established at the prompting of the UK government and the Bank of England. 

It must look less like a potential cleansing of the Augean stables with a bold decision and more like the task of Sisyphus

The debut standard covers reference price trades for the rates markets and specifically excludes guidance for comparable deals in foreign exchange and commodities. Its principles could have been designed to address client exploitation of the type of which Johnson and Scott are accused, however. 

The first principle is an admonition much like Google’s mantra ‘Don’t be evil’ (which was dropped by Google when the company rebranded itself as Alphabet last year). Dealers are urged to treat potential conflicts of interest in reference price rates trades “in a way that promotes the fair treatment of clients and other market participants”.

Further principles urge dealers to avoid hedges that are not consistent with normal market volumes, that create additional risk exposure or that are designed to affect the agreed end reference price for a trade.

If only Johnson and Scott had been able to consult these principles when they set off on their big adventure handling the Cairn $3.5 billion FX trade and generating a total of $8 million of revenue for their bank! 

They would not now face the wrath of a vengeful US justice system, although they would also presumably have had lower bonuses in the years when they took a creative approach to the art of execution and hedging.

The FMSB includes veteran trading managers who know perfectly well how the fixed income markets work and may, therefore, view their reform job with foreboding. It must look less like a potential cleansing of the Augean stables with a bold decision and more like the task of Sisyphus, who was doomed to push a boulder to the top of a hill only to watch it roll back down for eternity.

But the committee to save fixed income can surely agree that it is time to abolish ‘Christmas’ trades of the type greeted so enthusiastically by Johnson as an opportunity to exploit a client. 

And among the committee’s board members is just the man to unveil a tough new line: Samir Assaf, head of global banking and markets at HSBC.

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