Bank of England Director of Markets calls for tough FX trading guidelines to avoid a return to poor ethics

Chris Salmon, The Bank of England’s Executive Director of Markets has stated that FX traders need better guidelines to ensure ethical behavior and that a return to certain malpractices such as the distribution of information among themselves in order to manipulate rates does not occur.

According to a report by the Telegraph, Mr. Salmon has confirmed that at present, FX traders are behaving themselves in the wake of a series of fines and investigations.

Bankers are still reeling after UK regulators fined six major financial institutions a total of £1.4bn for manipulating foreign exchange benchmarks, and a series of class action law suits ensued costing over $1 billion per institution in settlements in some cases, while a number of ex-traders are facing prosecution for alleged fraud related to the Libor interest rate benchmark.

As a result, conduct has improved, but Mr. Salmon has stated that more concrete action is needed to make it a permanent change.

In order to make sure that any traders tempted to transgress do not do so, the Bank of England is planning tougher guidelines for the bankers, as well as the threat of prosecution for market abusers.

“When you go and talk to people who run the FICC (fixed income, currencies and commodities) trading teams, you get the impression the psychology has changed, there is greater caution within firms and within individual traders as a result of the crisis and some of the scandals which have followed it,” Mr Salmon told The Telegraph. “But we can’t just rely upon the immediate psychological reaction to the crisis, because memories are short.”

The Bank of England’s solution has been to draw up a new code of conduct for traders in foreign exchange markets, working with foreign regulators to tell traders across the world how to behave.
National codes have existed before – Britain’s is the non-investment products code, or NIPS code, which runs to 41 pages and covers areas from pricing and concluding deals through to confidentiality.

“With the benefit of hindsight, [the NIPS code] didn’t prove effective in ensuring good conduct all of the time in forex markets, because otherwise we wouldn’t have had the enforcement cases,” said Mr Salmon.

“Although it is true to say the NIPS code could have been better, actually a number of things which went wrong clearly didn’t comply with the code. So the underlying issue wasn’t the code, as much as lack of adherence to the code.”

He will spend two years with global regulators working on a code which fits the day-to-day operations of traders so they know how to behave in each part of their job, and in their interactions with other traders and brokers.

The aim is to “provide more granular guidance to traders that they could follow, and to think about mechanisms to increase the incentives for firms and individuals to adhere to the new global code,” he said. Therefore, to make sure it works, rogue traders will also face greater punishments.

“Codes by definition are non-statutory instruments, but that doesn’t mean wrongdoing won’t result in criminal sanctions. The UK authorities made it clear they intend to extend the reach of the market abuse regulations further into FX markets, and they’ll do that in the context of the work which is done on the global code,” said Mr Salmon.

Bank of England governor Mark Carney is shifting his focus onto financial markets, putting Mr Salmon in the spotlight

Although these international negotiations will keep Mr Salmon busy, they are far from the only new development on the executive director of markets’ plate.

Mr Salmon assumed his current position one year ago, just in time for a major pivot in regulatory policy from banks and towards financial markets. He is a long-term employee at the Bank of England, with more than 20 years in Threadneedle Street under his belt.

His career includes a stint as former governor Sir Mervyn King ’s private secretary, as well as three years as chief cashier better known as the man whose signature is on all banknotes issued from 2011 to 2014.

Since the financial crisis, the Bank of England has focused tightly on banks as the core of the credit crunch and as the biggest risk to financial stability.

But now banks have built substantial capital buffers and simplified their businesses, the regulator is looking to the markets that connect financial institutions to each other and to the public. It gives Mr Salmon a wide and varied remit, and takes the Bank into areas in which it has had limited previous experience.

As a result, he is issuing a call to all parts of the fixed income, currencies and commodities markets to tell regulators where potential problems might be, in any area they want to mention. These will be presented and discussed in what the Bank is calling an Open Forum event in November.

“The point is to get a diverse range of views about where we need to focus on it would be wholly wrong therefore for the Bank of England to define the agenda and say, this is what we need to focus on. That would be missing the point,” he said.

But he is certain that regulations cannot stand still when the structure of markets is changing rapidly. The asset management industry, which is responsible for directing enormous flows of capital, has doubled in size in the past decade to $70 trillion, for instance, while algorithmic trading, which dominates in areas like futures markets, results in lightning-fast market moves that regulators need to track if they are to monitor financial stability.

“One of the key lessons from the past 15 years is that the infrastructure around markets needs to change as those markets themselves change. We should want innovative markets which can adapt, evolve and change,” he said.

“But if we’re going to allow that, we need to make sure the infrastructure around them the hard infrastructure, like the trading venues and the rules, and the soft infrastructure around codes of conduct evolves in line with those markets so they continue to operate effectively.”

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