Shocking revelation by FCA Enforcement Director that spot FX is not regulated in the UK

Tracy McDermott has categorically stated that spot FX does not fall under FCA remit, having come to light after it emerged that some of the traders being investigated for FX rate rigging were not registered yet worked for major financial institutions

A great many retail FX firms have invested vast resources in gaining the much-coveted Financial Conduct Authority (FCA) regulatory oversight, and positioning themselves alongside established institutional firms in the world’s largest financial center, London.

The kudos provided by the FCA license, as well as London’s perceived status as a respectable and stable region from which to do business have been major factors in attracting firms to operate from the City.

Britain’s authorities may well have a reputation as the providers of a highly organized financial markets structure, but in an alarming report by Reuters yesterday, FX dealers have been able to operate quite legitimately without being registered by the FCA, some of whom are currently on suspension or have had their employment terminated as part of the global FX rate rigging investigation.

Three of the 17 London-based FX operatives suspended or fired by their banks recently as the investigation by regulators around the world has gathered pace were not registered or approved by the FCA.

Of those three, one was Rohan Ramchandani, formerly of Citi (C.N), who the bank says was removed from his post in January as head of European spot trading. He effectively oversaw the trading of hundreds of billions of dollars a week, trillions a year. Citi did not say why he was fired and the trader could not be reached for comment.

The revelation by FCA’s Director of Enforcement yesterday that “Spot FX is not a regulated activity” alludes to the possibility that the UK does not offer the cast-iron customer protection that is afforded to its transatlantic counterparts.

Quite the contrary, if there is no actual remit to regulate spot FX, efforts to gain an FCA license for a firm that purely provides FX could well be in vain.

Ms. McDermott went on to specify that any changes to the current rulings that spot FX does not fall under the remit of the FCA is in the hands of the government, and not the FCA itself.

Last year, when the Bank of England assumed responsibility for overseeing the activity of banks, and the FCA took the reins when it comes to overseeing non-bank financial markets participants, it created a different structure for retail FX firms compared to FX dealers within the interbank sector subsequent to the all-encompassing Financial Services Authority (FSA) having been superseded.

If Ms. McDermott’s somewhat eyebrow-raising statement is indeed to be taken literally, then a whole different light could be cast upon the methods of ruling the OTC derivatives market in London.

LeapRate spoke to a senior executive within one of London’s long-established institutional FX firms, who explained that “If so many people trading so much volume have been fired it probably explains why volumes and volatility are down so much.”

With regard to the actual regulatory status of spot FX, this particular executive explained to LeapRate that “Nobody seems to know, however it could well be a confusion in that she is referring to the trading part. For example, under the new EMIR rulings, spot FX is not covered, but rolling spot FX is.”

He concluded by stating that “some banks and brokers have ignored EMIR as a result.”

“It seems pretty stunning that individuals who can enter an institution into a contractual deal worth billions of pounds – even if under instructions from other, regulated people – can do so without formal recognition by the regulator,”Mark Garnier, a Conservative lawmaker and member of parliament’s Treasury Select Committee told Reuters.

Ms. McDermott adamantly continued her insistence that “If you are not an approved person we don’t currently have the ability to fine you.”

“You don’t have to have been approved in order to be banned. We do have the ability to investigate you and we do have the ability to prohibit you, to ban you from the industry” she concluded.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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