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Forex markets face further regulations (Financial Times, September 30, 2014 4:07 pm, by Sam Fleming)

Participants in foreign exchange markets have been warned they may face further regulatory change even after implementing a long-awaited series of recommendations aimed at removing the taint affecting the sector. A task force set up by the Financial Stability Board on Tuesday set forth 15 reforms aimed at overhauling the $5tn currency markets following allegations surrounding the crucial 4pm forex fixing. The report from the global umbrella group said it expected the industry to accept all of the ideas, which include tougher rules aimed at minimising conflicts of interest within banks and a well-flagged widening of the window of time during which the key forex benchmark is calculated. But the report cautioned that further change could still follow down the line – with Britain already consulting on including the 4pm fix in a list of benchmarks that are policed by regulators. “Investigations into alleged misconduct are ongoing across a range of markets, and it is possible that the authorities will ultimately conclude that regulatory change is needed to promote or ensure appropriate behaviours and/or to implement the recommendations of this report,” the report said. 

The FSB started to scrutinise the London-dominated global forex market in February after a sprawling investigation by regulators and prosecutors into benchmark-rigging allegations piled on pressure to reform a largely unregulated industry. Its proposals suggest that the key window during which the 4pm fix is calculated be extended from the current period of one minute to make it less prone to manipulation, with industry feedback pointing to a five-minute window. However regulators shelved a previous suggestion that would have created a global “utility” to match fixing orders placed by market participants, saying it wanted to allow industry-led initiatives to move ahead. 

The FSB report said that banks need to implement tough procedures separating the work of handling fixing orders from other business, reducing the potential for manipulation to occur. “Firms should establish distinct and separate processes for managing fixing flows as part of their effort to ensure that customer and flow information is appropriately protected,” the FSB said. It noted that such changes were “not costless” and could reduce banks’ capacity to absorb the risk from transactions, but it insisted this did not overshadow the benefits of reform. The FSB also called for codes of conduct governing the sector to be much clearer about what information can be shared between market-makers. 

Marshall Bailey, President of the ACI, an industry group, said: “The formal adoption of an international set of standards for ethical conduct and behaviour across the global financial industry will provide clarity and guidance on what is expected of all market professionals, from day traders to senior executives.”

James Kemp, Managing Director of the FX division of the Global Financial Markets Association, said: “There may well be challenges and costs in implementing the changes, but enhancing confidence in the market is crucial and the industry will adapt to embrace these recommendations.”