Fixes For FX - How Would Recent Regulatory Changes Have Affected Liability For Foreign Exchange Manipulation?

Author:Mr Richard Caird, Alexandra Doucas and Katharine Harle
Profession:Dentons (United Kingdom)

In our recent article " How might the proposed new senior managers and certification regime for individuals have affected accountability for foreign exchange manipulation?" we considered how the proposed new regulatory regime in relation to individual accountability would have affected those responsible (both directly and indirectly) for the manipulation of spot foreign exchange rates which was the subject of recent enforcement action by the FCA.

In this further article, we consider the possible effects on the behaviour identified by the FCA of changes to the regulation of the foreign exchange market and of benchmark setting.

Regulation of the foreign exchange market

The Fair and Effective Markets Review (FEMR) is currently consulting as to what further action (by the industry and by regulators, domestically and internationally) is desirable in order to improve the fairness and effectiveness of Fixed Income, Currency and Commodities (FICC) markets. FEMR is due to deliver its final recommendations in June 2015, but its Consultation Document of October 2014 provides some useful indications as to FEMR's methodology and some of its assumptions.

In particular, the Consultation Document emphasises the range of new measures already making their way into the regulatory canon, and FEMR's wish to avoid unnecessary additional regulation. It points in particular to the introduction of MiFID 2 which will cover most currency derivatives. It will not, however, apply to spot FX which, according to the statistics quoted by FEMR, accounts for 38 % of foreign exchange instruments traded. The activity in relation to which the recent fines were levied was, of course, manipulation of FX spot rates. FEMR also refers to the introduction of the Market Abuse Directive and Market Abuse Regulation, which will extend the application of market abuse provisions to manipulation of FX benchmarks in July 2016.

Nonetheless, FEMR is consulting as to whether there are still regulatory "gaps" which should be filled.

Regulation of benchmark setting

The recent scandal in relation to manipulation of some FX spot rates had a particular resonance because of the findings two years earlier that another benchmark, LIBOR, had been the subject of artificial submissions. The FCA was particularly critical of firms' failure to address FX manipulation in part because it felt that the LIBOR controversy should have caused the banks to take action in respect of similar risks of abuse, rather...

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