FX market makers need to review their existing practices around “last look” in order to protect themselves from regulatory investigations, according to legal experts that participated in a webinar on the “Implications of the Recent Last Look Settlements on Your Business”, hosted by the Foreign Exchange Professionals Association (FXPA) yesterday.
Opening with an overview of the FXPA’s recently published “Focus on Last Look” educational paper on the subject by Chip Lowry, senior managing director at State Street Global Markets and chair of FXPA’s Policy Committee, lawyers from Steptoe & Johnson, partners Jason Weinstein and Michael Miller, took up the baton.
Discussing the implications of Barclays’ recent $150 million settlement relating to its last look practices in the FX market, lawyers on the webinar said that market makers should review how they use last look ahead of any regulatory scrutiny.
Barclays’ settlement was with the New York Department of Financial Services (NYDFS), but the lawyers said that they expect to see continued scrutiny of last look practices from a wide range of law enforcement and regulatory authorities around the world.
“The Department of Justice has never been more aggressive in going after financial institutions and it’s never been more expensive to have the DoJ come after you,” said Weinstein.
He added: “For those firms that have a last look program, look very carefully at the way that it operates, look very carefully at what you say to customers about how it operates and look very carefully at your compliance procedures to make sure that you can identify any problem and deal with that problem.
“This is a moment in time when it’s extra important to make sure that you get out in front of any problems within your institution and deal with them before a regulator or law enforcement agent comes knocking with a subpoena or an investigative demand. In our experience, it is infinitely more expensive to respond to an investigation than to do your own investigation first.”
Miller concurred. “If you are under investigation or are expecting one, get ahead of the curve. If there’s anything that we’ve learned, it’s that if you get out in front of regulators and law enforcement officials in terms of identifying practices that need to be corrected and then doing so before you draw any fire, that’s enormously helpful,” he said.
Both Miller and Weinstein said that they expect market forces to change how market makers use last look functionality.
“On the back end of the Barclays case, you’re going to see a lot of market pressure moving participants in this industry in the direction of changes which give the market makers the protection that they need, but at the same time don’t disadvantage customers across the board. I think that market forces will do that,” said Miller.
Miller and Weinstein noted that there are already examples of market maker behaviour changing with regards to last look practices. One of the issues highlighted by the NYDFS in the Barclays case was that last look was being applied asymmetrically, meaning that Barclays only rejected trades using last look when the market moved in a direction that was disadvantageous to the bank.
Although using last look asymmetrically is not illegal, Miller and Weinstein said that some market makers are changing their last look models to make them symmetrical subsequent to the Barclays settlement. Additionally, they noted that some market makers are shortening the amount of time that they hold trades in the wake of the settlement.
“A very important question for market makers to ask is whether they have the tools available to spot toxic flow so that only a subset of trades are held and then potentially rejected? Are there systems available that market makers can use that differentiate between toxic flow and market movements that are of a more benign nature?” said Miller.
He also commented: “Taking a longer view, I think that market makers would be using their time and energies well if they look to see if there are enhanced market making platforms that have removed the need for a last look system in its entirety.”
Click here to access the full audio from the webinar.