Urs Bernegger, a former global head of FX Spot Trading at UBS and now CEO of Helvetii, an FX market strategic advisory firm, was one who was sounding warnings of the potential impact ahead of implementation, arguing for a cautious approach rather than one that relied on waiting for later assessments such as the conclusion of the FX Global Code of Conduct, which is not expected until May 2017.
Bernegger wrote in June 2016 that “in my opinion, FX spot should to be treated as a related part of MAR by the buy and sell side. Controls and procedures should be considered accordingly”.
A July 26 progress report into the Bank of England’s Fair and Effective Markets Review (FEMR) reiterated the view that “spot FX markets remain outside the scope of UK market abuse legislation, and will generally continue to be so even since the introduction of the Market Abuse Regulation on 3 July 2016.” As a result of this conclusion, the FEMR had in 2015 recommended that a new statutory civil and criminal market abuse regime be created for spot FX in the UK.
But MAR broadens the definition of ‘financial instruments’ caught by market abuse offences in line with the new categories of MiFID II to any instrument traded on a trading venue (including Organised Trading Facilities) or any derivative of such an instrument. Spot FX and cash commodity markets may therefore be covered where a link to a derivative instrument traded on a venue can be established.
This is a key point, explains Martin Lovick, principal consultant at ACA Compliance Group's London office. Whereas spot FX was previously outside the scope of market abuse regulations, it is now effectively captured by the broad concept of any transaction likely to affect the price of a financial instrument. Manipulating a spot FX contract with the purpose of manipulating the price of an FX forward or other derivative would therefore constitute market abuse.
James Kemp, managing director of the Global Foreign Exchange Division of the Global Financial Markets Association, says early feedback from his members has been mixed. “Some aspects of MAR – notably surveillance – present real technological challenges,” he says. “The requirement to capture and monitor all orders, quotes and RFQs is not yet fully feasible for voice trades, which constitute approximately 35% of FX trading. That said, the fact that all such calls are now recorded acts as a further deterrent.”
Kemp suggests that the transition to MAR has been helped by the pragmatic approach taken by regulators and supervisors to implementation. One example is their clarification that not all non-factual client communications are necessarily investment recommendations under MAR, or investment advice under MiFID.
The regulation is expected to build on work already done by banks to make client communication more appropriate and to limit gossip. John Halligan, president of Global Trading Analytics, notes that experience shows self-regulation has only limited effect. “While the banks are earnest in their pledge to clean up their FX operations, an overlay of reasonable regulation can only encourage them to do so.”
David Clark, chairman of the Wholesale Markets Brokers' Association observes that previous efforts to improve behaviour in traded markets in general (not only FX) have been a key precursor to a more refined market abuse regime that will dovetail with the FX Global Code of Conduct, which has been developed by the Foreign Exchange Working Group (FXWG) under the auspices of the Bank for International Settlements. The latest update on the code was produced by the FXWG in May 2016, with final guidance expected in May 2017.
“It should be noted that improper gossip is just one of a number of behavioural improvements that need to be made and is not necessarily market abuse,” says Clark.
Any measures that augment the codes of conduct in FX by giving clear, unambiguous definitions backed up by both the civil and criminal law regimes are welcome, says David Woolcock, chair of the committee for professionalism at ACI, a global association of wholesale financial markets participants.
“The accepted market practices provisions allow for the establishment of accepted market practice,” he says. “For spot FX in particular we await further developments on the new statutory civil and criminal market abuse regime for spot FX in the UK.”
MAR defines the market abuse offence of ‘dissemination’ as the dissemination of information through the media (including the internet) designed to give false or misleading signals to the market in respect of financial instruments or related products, adds Lovick.
Halligan suggests that the impact of market abuse should be a factor in how investigations are pursued. “The material impact of abuse is a question that the FX industry and regulators might benefit from having answered,” he concludes. “It is important that the resources expended are reasonable, well targeted and based upon some reality of the impact or potential impact of any nefarious activity.”