As the foreign exchange benchmarks scandal continues to scorch the financial markets earth, banks and regulators are trying to get to grips with making sure it cannot happen again.
What the FX rate fixing and other recent market abuse cases like Libor, Sibor and the Gold fixing make clear is that the whac-a-mole method of risk management employed by participants — akin to wielding a big mallet after the mole has done the damage — is no longer adequate.
As we know, Whac-a-mole is a popular one or two person fairground game where moles pop furry electronic heads up out of five holes at random and the players use a big, rubber mallet to whack them. And, in FX, the moles are indeed getting whacked.
According to Bloomberg, more than 30 traders from 11 firms have been fired, suspended, taken leaves of absence or retired since October 2013, when regulators first said they were investigating.
Meanwhile, one of the more proactive regulators — the Monetary Authority of Singapore — in its process of investigating banks also found some inappropriate communication between one of its own staff and Deutsche Bank. Deutsche Banks FX head resigned at the end of April.
In March, the Bank of England suspended one of its employees in connection with the market rigging. And there are recent reports that the U.S. Department of Justice and the U.K.’s Financial Conduct Authority are raiding U.S. banks and grilling London-based FX traders that may have been involved with rigging currency rates.
This is all well and good, but it is pretty late in the game. Manipulation had likely been going on for some time before it was discovered. According to FX Week, plaintiffs in the FX class action suit against banks will allege that the WM/Reuters foreign exchange benchmark was manipulated more than 25 percent of the time and over a period of more than 10 years.
The reaction in Singapore has been a bit more proactive, on the other hand. Banks were ordered by the MAS to carry out independent reviews of their FX trading operations and to prove to the MAS that they had it under control. In the meantime, the regulator sequestered about a billion dollars from the banks and locked it up until the banks could convince the regulator that they had done it.
Innovative Singapore-based banks had to find surveillance solutions that could monitor FX spot trading and non-deliverable forwards (NDFs) contracts, which are instruments for thinly traded, non-convertible foreign currencies. These surveillance solutions had to be able to spot odd movements in NDFs, or pinpoint wash trades and off-market prices.
This mandated (and money-manacled) exercise showed the banks just how simple proactive risk management can be. Rather than just ticking boxes for compliance purposes, they can now actively monitor FX trading and avoid issues with manipulation or fraud. They can check open positions and risk limits in real-time, across the enterprise.
The response has been so good that many are now talking about rolling out surveillance technology across products and lines of business, monitoring both external and internal data. They are moving from reactive to proactive risk management and doing so in a more holistic way.
One way to do this is via making someone in a firm take the blame if something blows up, ensuring no one is too big to jail. The U.K.s Financial Conduct Authority has moved to hold risk officers personally responsible if something untoward happens in their company. This means they cannot just tick the boxes on compliance when it is their jobs and personal reputations at risk.
Using surveillance technology is one important tool that can help to stop risky situations from turning into money and job losses. Rather than whacking at moles in several different holes, innovative financial services companies can watch the moles and stop them while they are digging.
Dr. John Bates is CTO, Intelligent Business & Big Data at Software AG.
