“The pendulum always swings, and swings hard, the other way after periods of scandals and fines,” Maack said.
Some financial firms are taking fingerprints to prevent financial crimes, and several banks have moved front-office staff into risk departments to police their ex-colleagues, according to the currency traders who asked not to be identified. Some bankers say they avoid meeting socially to prevent the appearance of collusion. Even jokes are discouraged.
‘Commercial Opportunity’
For Adrian Boehler, global co-head of FX local markets and commodity derivatives at BNP Paribas SA, bolstering standards has become a “commercial opportunity.” The bank, which agreed to pay $686 million over the past two years for misconduct, now segregates order information and automates some trades to avoid conflicts of interest.
Boehler works in London under the Financial Conduct Authority’s Senior Managers Regime, which “makes me personally liable for anything untoward that happens on my watch,” he said at a conference in February. “Consequently, I sleep much better at night knowing that I have embedded in the first line of defense, i.e., embedded in the business, a surveillance mechanism which gives me feedback from the front line.”
At the Federal Reserve Bank of New York, audit and compliance teams are “pretty tough,” said Simon Potter, head of its markets group. The bank’s operations are reviewed by independent risk teams, separate from the trading desk, forming a second line of defense against misconduct, Potter said. Companies that sit on the foreign exchange committee overseen by the New York Fed also have a similar setup, Potter said at a July conference.
Rebuild Trust
Potter is steering an effort to overhaul standards and rebuild trust in the currency market, which is mostly over-the-counter, spans the globe and doesn’t fit neatly under the authority of any single regulator.
Despite the cleanup effort, there are still concerns about routine misbehavior, particularly around the controversial practices of last look and front-running.
The zero-tolerance approach among many industry executives means that FX staff have to accept heightened scrutiny if they want to stay in the business. Some market participants complain that the tactics used are inefficient and ineffective.
“Only when traders see that they can go to jail will they improve their behavior,” said Mayra Rodriguez Valladares, a former foreign-exchange analyst for the New York Fed, who conducts training for bankers and regulators via her consulting firm MRV Associates Inc.
Banks are starting to find other uses for their surveillance software, according to LoGalbo at NICE Actimize. They’re using it to listen for trending topics in conversations among personnel and clients that might help to sell financial products.