An end to the global currency market’s four-year quest to crack down on a controversial trading practice that allows dealers to back out of transactions if prices move against them looks further away than ever.
The committee overseeing a voluntary code of conduct in a market worth nearly $7 trillion a day released new guidelines on so-called last look earlier this month, but these principles have only stoked a new wave of push back from traders frustrated at their framing. Liquidity provider XTX Markets, a member of the Global Foreign Exchange Committee’s working group on last look, critiqued the consultative process and labeled the paper a missed opportunity to settle the issue.
Last look is akin to trying to pay for food at a grocery store, but being told the store won’t sell it to you at the price listed on the shelf. In foreign exchange, the bedrock of global finance and commerce, dealers sometimes say they’ll buy or sell a currency at a certain price, but after a trader accepts that bid or offer, the dealer backs out.
Some are going as far as to imagine the almost unthinkable: foreign exchange, a notoriously lightly-regulated business that’s seen so much scandal over the years, may need more formal external oversight.
“It’s almost an unsolvable point because so many parts of the industry have different views,” said David Mercer, chief executive officer of currency-market operator LMAX Group. “Every iteration of the code makes the ecosystem of the market slightly better, but we’d like it to be made better quicker.”
In the 2017 FX Global Code, a voluntary list of best practices for currency trading, last look got some standards but was not banned, and has been subject to heated debate since. Vanguard Group Inc. didn’t sign the code for years because it wanted stronger restrictions, though the $7.2 trillion asset manager finally relented in 2020.
Lawsuit, Allegations
This month, currency traders filed a class-action lawsuit against Goldman Sachs & Co. and State Street Bank & Trust Co. that included allegations the liquidity providers were given last-look rights, allowing them to unilaterally cancel matched trades. Buy-side firms have repeatedly expressed concerns dealers could be ripping them off.
The Global Foreign Exchange Committee issued additional guidelines in a paper last week after last look received the most feedback in the group’s market surveys on how to improve industry rules. It’s intended to complement Principle 17 of the FX Global Code, which addresses the practice.
Last look should be applied in a “fair and predictable manner,” according to the new GFXC document. The practice should be used only to ensure there is sufficient available credit to close the transaction, and that the price at which the request was made remains consistent with the current level. Liquidity providers should apply these checks without delay and “promptly” decide whether to accept or reject trades. The committee is also “strongly encouraging” liquidity providers to fill out disclosure sheets on their last-look practices.
XTX Co-CEO Zar Amrolia was surprised the document came out last week because “the last look working group had not signed off on the guidance, collectively agreed on key issues or even seen the final text of the published guidance,” he said in an interview.
“Client feedback was never formally discussed,” Amrolia added. “Whilst the disclosures are a step forward, this was yet another missed opportunity for the GFXC to close the loopholes in Principle 17 and, as it stands, misbehavior and the questions around last look will not likely change with this guidance.”
Honor Code
Some industry players say the latest guidelines fall short because even though they recommend dealers disclose the time window they need to confirm the trade, there’s no precise guidance on how long that window should be. Dealers can also pull out of trades if market prices move against them, but not when prices move by a similar amount in their favor.
“Obviously the liquidity providers should not be going out of their way to rip off customers, but at the same time we’re trying to give customers the information and the tools in a comparable way to assess how they’re being treated,” Guy Debelle, chair of the GFXC, said in a phone interview. He added the working group doesn’t get a final say over Global FX Code regulations.
“We’re going to keep an eye on this, and if this message isn’t getting through well enough, then we may need to revisit the actual wording of the principle itself,” he said.
The debate lasted years, likely a byproduct of GFXC’s consensus-based approach. That’s prompting some, including LMAX’s Mercer, to contemplate a more formal regulatory structure.
“I like the fact FX is self-regulating. Going back decades there has been an honor in the market and that’s what the code is trying to be: an honor-driven code,” Mercer said. “But the alternative is regulation. I think it would be tough to regulate, but not impossible.”
