LMAX Exchange is calling for UK financial regulators to show worldwide leadership in order to deliver on the FEMR objectives to improve transparency in the FX market. The objectives were set out by the Chancellor of the Exchequer and the Governor of the Bank of Engand in June 2014.
This call to action comes at a time when the market sentiment still suggests a lack of trust in FX trading, the world’s largest asset class. It also comes at a crucial juncture for the UK government’s aim to protect the UK’s leading position in the global financial markets.
LMAX Exchange believes that there is more urgency than ever for UK regulators to lead with impactful reforms to improve transparency and fairness in the global FX market. Action now would put an end to the two-year regulatory inertia. This is supported by the industry survey findings, detailed in the newly launched report by LMAX Exchange.
‘The road to FX reformation: Restoring trust – a second look at market progress’ highlights that FX market participants don’t believe much has changed in the last two years. They also question the ease of implementing Code of Conduct on a global scale.
As a result, LMAX Exchange is calling on the FCA, BoE and HM Treasury to use the FEMR process and drive the global FX regulatory agenda. It wants to see the introduction of new industry standards and a commitment to a clear timeline for ridding the market of practices open to abuse, such as ‘Last Look’.
This mirrors the objectives set out by the FEMR in 2014 to “reinforce the confidence in the wholesale Fixed Income, Currency and Commodities (FICC) markets in the wake of serious misconduct seen in recent years; and to influence the international debate on trading practices.”
The market survey findings presented in ‘The road to FX reformation’ report highlight:
FX market’s disillusion with regulatory initiatives over the last two years
- 65% of the respondents don’t believe they get fair execution when trading FX
- Over 60% doubt the impact of the global code of conduct, expecting potential conflict with local regulations
- A majority believed that transparency had not been improved since the FEMR review
Clear signal that ‘Last Look’ must go:
- Findings highlighted the extent to which ‘Last Look’ is open to abuse – 50% of respondents said they weren’t aware of the process
- 76% of aware respondents preferred to trade without ‘Last Look’
- 62% of aware respondents said ‘Last Look’ is the most unacceptable market practice
Industry’s view on what can improve transparency
- 78% believed that ‘Last Look’ should be abolished
- 77% said that FX should move to rules-based regulated trading environment
- 71% of respondents believed that FX trading should move to execution-only venues
The findings show that LMAX Exchange’s continuing efforts to rid the market of trust-damaging practices is as relevant as ever. The Global Code of Conduct has been welcomed, but market sentiment, judged by the survey, suggests that the global FX industry is not convinced of its potential impact.
LMAX Exchange is calling on regulators to:
- Define how a transparent and fair FX trading environment should work. This requires specificity about the required business model, trading rules and market practices
- Commit to a clear action plan for change with a timeline that includes the abolition of market practices open to abuse
- Appoint and empower the delivery body to implement the transparent state of the FX market within a certain timeframe
David Mercer, CEO of LMAX Exchange, comments, “It is clear that restoring trust is the biggest challenge that the global FX industry faces. Fines for market abuse have continued since we last provided an in-depth survey of the market. The Global Code of Conduct has been launched to a lukewarm reception, but only addresses the ‘voice market’, just 30% of the industry. The easy questions have been answered, with the hard ones yet to come.
As a result, we are calling on the UK regulators to show global leadership in current uncertain times and abolish ‘Last Look’ among other practices that are open to abuse. This requires a clear timeline and action plan, significant revision to the composition of the working groups and a total focus on the ways that technology can make the global FX industry work more effectively.
These findings should concern those seeking to reform the FX market. FX can only thrive as a liquid, global and essential market that it should be if it engenders trust among all market participants.
This research shows that the market still has a long way to go to win back trust and there needs to be greater focus and urgency to address the major issues at play. This is being brought under even sharper focus with the exceptional global uncertainty following the UK’s Leave vote in the EU Referendum.”