Becky Stones and Rob Mason – FRA
Allegations of failures of culture and conduct continue to surface within the banking sector. The most recent is the complaint by NY state Attorney General Eric Schneiderman against Barclays relating to its Dark Pool. There are strong economic arguments for moving beyond the industry wide cycle of conduct shortfall leading to regulatory censure leading to civil litigation. Accordingly, many within the sector and their legal advisers argue that all significant bad behavior has been uncovered and it is now time to move on. This, however, appears unlikely.
It is clear from the recent scandals that being proactive, engaging and cooperative with regulators and prosecutors pays off. The penalties and fines for those not being proactive and fully cooperative with the authorities have been heavy, the most recent example being the $8.9bn fine for BNP Paribas. Denial and/or deferral is not the ethical or economic option. In contrast, UBS avoided a €2.5bn fine from the European Commission for proactively reporting its participation in the LIBOR fixing cartel. Banks who undertake a thorough review of parallels, to “read-across” from each of the conduct based scandals over the last years together with implementing effective remediation throughout all business areas will stand at a significant advantage. Regulators and prosecutors are now more aggressive, clients less trusting and ex-employees more disaffected. Those who do not actively get on top of conduct issues run the risk of paying a significantly heavier price in the future if these issues are subsequently unearthed by regulatory enquiry, through client complaints, by whistleblowers or by pier group allegations and revelations. The resultant damage will extend beyond penalties and fines to loss of reputation, clients, profits and the loss of control of business development or strategic direction to various regulators. Those firms who remain reactive, putting out one fire after another, executing one set of plans after another at the behest of or in response to different regulators, can expect to lose significant market share to those able to focus on a well-defined strategic path.
This read-across informed by recent and ongoing investigations is not just a review of the low-hanging fruit where small pockets of employees have behaved badly in the past. It is a thorough deep-dive lateral analysis into all areas of activity, for example a look into the finer details of client order handling and trade execution, client communications and representations and market observations and fixings and associated trading behavior across all asset classes and trading venues. At its heart lies the question as to what the root cause is and where the next manifestation is likely surface. This requires far more than the training of all staff on the broad concepts of culture and conduct. Whilst this a good place to start it is indeed just that, a start. Such generic training would be unlikely to cause a trader doing his job in the same way as he has always done, just as he was taught by his manager, to adequately question whether his specific conduct stands up to scrutiny.
Until such a thorough read-across is undertaken and remediation and monitoring is implemented, we believe the next set of headlines reporting on the next major investigation remains inevitable.
We look at the read-across from the recent lawsuit filed against Barclays relating to its ‘Dark Pool’ activity. Dark Pools are private trading venues. They were created to enable institutional investors to match buy and sell orders for large volumes of stock away from traditional exchanges where High Frequency Traders (‘HFT’) operate.
These dark pools were actively marketed by their operators – which include some of the largest stock-trading investment banks – as a safe haven from HFTs for institutional investors.
In the US, financial market rules (specifically Reg. NMS) lead to large orders being split across multiple traditional exchanges because of the requirement to get the best price regardless of speed or reliability of order execution. HFTs take advantage of this order fragmentation by placing aggressively priced orders in small size across multiple exchanges and watching the patterns of execution to identify when large orders are being executed. To gain a critical few microseconds advantage in accessing trade order data and the placing their own orders, HFTs use the very latest computer and network technology and pay exchanges to keep the computers which run their HFT algorithms in the same data centres as the exchanges own computers. Once a large order is identified, HFTs can apply their speed advantage to trade with the market in front of the remainder of the large order. This pushes the price to a worse level for the original order. A few microseconds later, the HFT can then put this liquidity back into the market at the worse price with the expectation that the large order will execute against it providing a quick profit for the HFT and worse pricing than anticipated for the large order.
This HFT behaviour led to the creation of alternative opaque trading venues. These dark pools were actively marketed by their operators – which include some of the largest stock-trading investment banks – as a safe haven from HFTs for institutional investors. Eric Schneiderman, NY state attorney general, recently filed civil fraud charges against Barclays over its dark pool alleging that it favoured HFTs over other investors and misrepresented the level of HFT activity in its dark pool to client.
What is the read-across from this lawsuit? Paradoxically, the equity market is one of the better regulated markets. Dark pools, however, fall outside of many of these regulations. To read across, banks should proactively examine other areas of market-making activity for falsified marketing material and representations to its clients. We would recommend that banks undertake a risk-based sampling of marketing material and examine for misleading client representations and to confirm that different clients receive consistent information and a consistent message. The risk-based sampling would focus on areas where trading is lightly or not regulated and pricing is opaque.
Ongoing risk-based sampling should be based upon an understanding of the fundamental risk – in the instance of dark pools, though not in themselves inherently problematic, potentially a combination of a lack of transparency disguising conflicts of interest as evidenced by misrepresenting marketing – sampling should be based upon where else these risks could surface and result in potential abuse.
All such testing and deep-dive review results should be fully documented and evidenced to provide audit trail of both good and sub-standard practices requiring remediation throughout the organization. As banks become more proactive they should be in a position to demonstrate good behaviour and ongoing sampling results. As such they frame breaches as anomalous rather than systemic – a key defence, a key element of compliance and a key way to test and underpin the fundamental value of a specific business line.
Forensic Risk Alliance
Forensic Risk Alliance is a leading firm of international forensic investigators and accountants, data protection experts and eDiscovery specialists with offices in the US, UK, France and Switzerland. FRA has been involved in some of the largest regulatory investigations worldwide and frequently deals with US and EU prosecutors. It helps businesses to resolve complex and high-risk financial, legal and regulatory challenges. Its people provide independent, conflict-free advice and litigation support services.
Dollar bounces off six-week low as traders prepare for Powell
By Tommy Wilkes
LONDON (Reuters) – The dollar rebounded off six-week lows on Tuesday as investors’ focus shifted to how U.S. Federal Reserve chief Jerome Powell might respond to resurgent inflation expectations, while commodity-linked currencies hovered near multi-year highs.
The recent rise in inflation expectations as investors bet on a post-pandemic economic recovery and the so-called “reflation” trade has lifted U.S. government bond yields. That had fed through to a higher dollar until earlier this month when the greenback resumed its decline.
Analysts expect Powell, who testifies before Congress at 1500 GMT, to provide some reassurance that the Fed will tolerate higher inflation without rushing to raise rates. That might calm bond markets and eventually weigh on the dollar, they said.
“Mr. Powell will very likely reiterate that the Fed is a long way from meeting its goals and that it will likely take some time before “sufficient progress” has been made to taper its bond purchase program,” UniCredit analysts said.
The dollar index was last at 90.143, up 0.1% on the day, having earlier fallen to 89.941, its weakest since Jan. 13.
Graphic: U.S. dollar index
Positioning data shows investors overwhelmingly betting that a U.S. dollar, which has been dropping since last March, will keep falling as the world recovers from the COVID-19 pandemic.
“Only when the spike in U.S. yields becomes more disorderly and spills forcefully into risk assets, would U.S. dollar experience an across-the-board strength,” said ING analysts in a research note.
The euro weakened 0.1% to $1.2151. Euro zone government bond yields have also been rising but the rally took a brief pause after European Central Bank President Christine Lagarde said on Monday the bank was “closely monitoring” rising borrowing costs.
Commodity-linked currencies have been among the best performers in 2021. Surging prices for materials from oil and copper to lumber and milk powder have pushed currencies such as the Canadian, Australian and New Zealand dollars to their highest in roughly three years.
On Tuesday, the Aussie traded down 0.2% at $0.7903 having earlier hit a high of $0.7934. The New Zealand dollar was down marginally while the Canadian dollar was just below its Monday high.
Sterling hit a new nearly three-year high of $1.4098, up 0.3% on the day, as investors stuck with their bets that a rapid rollout of the COVID-19 vaccine would allow the British economy to reopen over the next few months.
Prime Minister Boris Johnson laid out his step-by-step plan for ending the current British lockdown on Monday.
Bitcoin, the world’s biggest cryptocurrency, fell sharply below $45,000 and was last down 15% at $45,953, extending its drop from a record set on Sunday of $58,354 as investors grow nervous about sky-high valuations.
The Japanese yen, the worst performing major currency of 2021 because rising U.S. Treasury yields can lure investment from Japan, fell again. The dollar was last up 0.2% at 105.26 yen per dollar.
(Additional reporting by Tom Westbrook in Singapore; editing by Emelia Sithole-Matarise)
Stocks struggle as tech slide erases commodities surge
By Danilo Masoni
MILAN (Reuters) – World shares struggled on Tuesday as a rally in commodity-related assets gave in to pressure on heavily weighed tech stocks and investors awaited reassurance from U.S. Federal Reserve Chair Jerome Powell on the path for monetary policy in United States.
European tech stocks were on set for their worst day in four months, down 2.7%, and futures on the Nasdaq fell 1.5% after losses in stocks like Apple and Tesla dragged the index down 2.5% on Monday.
“The prospect of a less dovish tone from central banks, sparked by rising inflation, is causing stock traders to reduce their exposure to equities, especially overbought sectors like tech,” said Pierre Veyret, analyst at ActivTrades in London.
The MSCI world equity benchmark fell 0.1% to fresh two-week lows by 1138 GMT, having earlier risen on gains in commodity-heavy equity indexes in Asia. S&P 500 futures also fell, and were last down 0.5%.
Tesla shares were set to plunge into the red for the year, hit by a fall of bitcoin, in which the electric carmaker recently invested $1.5 billion.
The level of angst was also reflected in equity volatility gauges which rose to multi-week highs, while on bond markets German and U.S. yields moved in different directions, even though both remained just below the highs hit on Monday.
After being knocked off from eight-month high by European Central Bank chief Christine Lagarde signalling discomfort with the recent surge in yields, 10-year Bund yields resumed their upward trend and were last at -0.297%.
Ten-year Treasury yields were steady below Monday’s one-year high of 1.394% and were last at 1.370%.
Fed Chair Powell is expected to be equally reassuring on the central bank’s dovish stance when he gives his congressional testimony at 1500 GMT in Washington.
“If there were already any expectations that Powell could try to calm down rates, then (Lagarde’s remarks) have just further cemented them,” said Giuseppe Sersale, strategist and fund manager at Anthilia in Milan.
Commodity prices strengthened again.
Oil prices jumped by more than $1 at one point, underpinned by optimism over COVID-19 vaccine rollouts and lower output as U.S. supplies were slow to return after a deep freeze in Texas shut in crude production last week.
Brent crude was last up 0.7% at $65.7 a barrel after earlier hitting a fresh 13-month high of $66.79, while U.S. crude rose 0.8% to $62.17 a barrel.
“Oil has been caught up in the broader commodities move higher, with a weaker USD proving constructive for the complex,” ING strategists led by Warren Patterson said in a note.
“Meanwhile, there is also a growing view that the oil market is looking increasingly tight over the remainder of the year”.
Copper prices meanwhile hit a 9-1/2-year high as tight supply and solid demand from top consumer China boosted sentiment.
In currency markets, the dollar briefly dropped to its lowest since Jan. 13 ahead of Powell’s testimony, while commodity-linked currencies hovered near multi-year highs.
The dollar index was up 0.1% at 90.137, with the euro flat at $1.215.
Bitcoin fell as much as 17%, sparking a sell-off across cryptocurrency markets as investors grew nervous at sky-high valuations.
(Reporting by Danilo Masoni in Milan; additional reporting by Anshuman Daga in Singapore; Editing by Ana Nicolaci da Costa)
G4S urges shareholders to accept Allied deal as bid battle ends
By Yadarisa Shabong
(Reuters) – British private security group G4S on Tuesday urged shareholders to accept Allied Universal’s 3.8 billion pound ($5.4 billion) final offer after the end of the U.S. bidder’s drawn-out takeover battle with Canada’s GardaWorld.
Hostile bidder GardaWorld had called a halt to the contest on Monday by telling the UK’s Takeover Panel it would not increase its December bid of 235 pence per share for the world’s largest private security company.
Allied on Tuesday said it would not increase the 245 pence per share offer it announced on Dec. 8, making it the final bid.
G4S had backed that offer last year after repeatedly rejecting GardaWorld’s hostile advances, but low shareholder acceptance forced repeated extensions to offer deadlines.
“G4S directors unanimously recommend that G4S shareholders accept the final Allied Universal offer,” The London-listed company said.
Allied on Tuesday extended its offer deadline to March 16 and the acceptance condition was lowered to 75% from 90% in nominal value and voting rights.
It has largely obtained the required antitrust regulatory approvals in the United States and European Union, Allied Universal added, though Britain has yet to approve the deal.
“The biggest issue now is probably the pension deficit in the UK, which has constricted M&A deals in the recent past involving G4S UK businesses,” said Morningstar analyst Michael Field.
G4S last year sold most of its cash-handling business to rival Brinks Co but held on to the UK operations with attached pension obligations.
In its offer document, Allied said it planned to evaluate the possibility of exiting the prison business, where G4S has faced problems in the past, and some other markets, such as Iraq, Afghanistan, Sudan and Uganda.
“Allied will have to work with the pension trustees to come to an arrangement if it wishes to divest anything here (in the UK),” Field added.
Shares in G4S traded flat at 242 pence at 0855 GMT.
($1 = 0.7102 pounds)
(Refiles to restore dropped letter in headline)
(Reporting by Yadarisa Shabong in Bengaluru; Editing by Rashmi Aich and David Goodman)
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