In November 2014 six banks were fined £2.6bn by UK and US regulators over their traders’ attempted manipulation of foreign exchange rates. Of the £2.6bn, £1.1bn was levied by the Financial Conduct Authority (FCA) on five banks – the largest fine that it or its predecessor (the Financial Services Authority) had ever imposed.
Regulators are focussing on conduct
These large fines follow a 13-month investigation by regulators into claims that the foreign exchange market – in which banks and other financial firms buy and sell currencies between one another – was rigged. The size of the fines is certainly a massive step up and is leaps and bounds above what we have historically seen in the equities market. This reinforces the growing and continued focus of regulators, particularly the FCA, on conduct.
Unlike retail markets, wholesale markets (including forex) have traditionally been viewed as being relatively free from oversight. This is because the market participants are large institutions that are adequately padded out from significant losses by the sheer nature of their size. However, it is now abundantly clear that abusive behaviour in wholesale markets can harm consumers as well.
In addition to acknowledging the wrong-doing of the banks, these fines highlight the sophistication of the regulators, who have begun to look into more complex areas by implementing better technology, deploying higher calibre experts and collaborating across jurisdictions. This case is the most significant collaboration between the regulators and follows a long line of market conduct scandals.
This enforcement case has shown the industry that regulators are not only reviewing trading activity, but are expanding the scope of their investigations to include communication with clients and other market participants via channels such as Bloomberg.
The lessons for firms
So what is the lesson here for firms? First, risk assessments specific to market conduct need to be seen as a priority. In addition, it is necessary to leverage e-communication archiving and surveillance tools to complement existing trade and order monitoring systems.
Firms also need to be doing more than just wondering whether they are keeping pace with their competitors. Instead, they need to work closely with software developers and other market conduct experts to be proactive in how they reduce and oversee conduct risk exposure.
This means firms should run risk assessments on themselves to identify which products, asset classes and desks are most exposed. This can be achieved by developing an action plan that not only builds strong controls, but also embeds advanced monitoring of communications, trades and transactions. And all of this must be done with a global approach as firms are under more global scrutiny then ever before.
Often firms are not raising suspicious transaction reports quickly or often enough to the regulator and as a result can find themselves nursing substantial losses. Here pre-emption is the name of the game and firms need to be monitoring for red flags against the products and scenarios that they are trading. Comprehensive monitoring programmes are therefore no longer a matter of compliance, but are an essential function in capturing a competitive advantage and maximising business value.
Given the increasing awareness of how abusive market activity can impact institutions and consumers alike, it is expected that market abuse and market conduct issues, like the forex failings, will continue to be a focus for regulators globally. Indeed, nearly half (44%) of senior executives surveyed in our Global Regulatory Outlook 2015 survey cited market abuse as one of the key areas they think regulators would prioritise in the coming year.
Mitigating market abuse risk at the firm level will require a significant commitment of resources, both from a personal and technology point, but such an investment is critical to success for the business. The public expects individuals operating in the financial services industry and employed by regulated firms to act with integrity and in the consumer’s best interests. It is therefore the obligation of those firms and employees to maintain market confidence by adopting the appropriate internal monitoring framework and controls.
Risk currencies recover from Friday carnage, dollar consolidates
TOKYO (Reuters) – The Australian dollar and other riskier currencies recovered some lost ground against the U.S. dollar on Monday, after suffering their biggest plunges in a year at the end of last week amid a hefty sell-off in global bond markets.
The greenback weakened broadly early in Asia trade, but barely enough to trim its biggest surge since June from Friday.
Currency markets have taken cues from the global bond market, where yields have surged in anticipation of an accelerated economic recovery.
The aggressive bond selling implies a bet that global central bankers will need to tighten policy much earlier than they have so far been forecasting.
Equities and commodities have also sold off as the debt rout unsettles investors.
“USD direction is likely to hinge on not only the direction, but also the pace, of global bond moves,” Commonwealth Bank of Australia strategists wrote in a research note.
Bond moves are trumping economic data as the driver of foreign-exchange markets, with yields moving “well in advance” of economic fundamentals, they said.
“The risk is tilted to a firmer USD this week because we doubt central banks will intervene in any meaningful way yet.”
The Aussie jumped 0.6% to $0.7754 early in the Asian session on Monday, following a 2.1% plunge on Friday.
The New Zealand dollar strengthened 0.6% to $0.7270, recovering some of Friday’s 1.9% slide.
The euro gained 0.2% to $1.20910, after dropping 0.9% at the end of last week, the most since April.
The dollar slipped 0.1% to 106.415 yen , but still near the six-month high of 106.69 touched Friday.
Federal Reserve Chair Jerome Powell, who last week repeated the U.S. central bank will look through any near-term inflation spike and tighten policy only when the economy is clearly improving, will speak on the economy this Friday, the same day as the usually closely watched monthly payrolls data is due.
The Reserve Bank of Australia will hold its monthly policy meeting on Tuesday, and markets are widely expecting it to reinforce its forward guidance for three more years of near-zero rates, while also addressing the market dislocation.
Currency bid prices at 050 GMT
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Euro/Dollar $1.2095 $1.2070 +0.22% -1.00% +1.2102 +1.2070
Dollar/Yen 106.4420 106.5700 -0.15% +3.02% +106.5670 +106.4000
Euro/Yen 128.74 128.60 +0.11% +1.43% +128.8000 +128.6000
Dollar/Swiss 0.9075 0.9086 -0.13% +2.57% +0.9086 +0.9060
Sterling/Dollar 1.3983 1.3923 +0.45% +2.37% +1.3990 +1.3931
Dollar/Canadian 1.2693 1.2740 -0.35% -0.31% +1.2732 +1.2690
Aussie/Dollar 0.7747 0.7799 -0.64% +0.73% +0.7757 +0.7706
NZ 0.7271 0.7231 +0.57% +1.27% +0.7280 +0.7234
Tokyo Forex market info from BOJ
(Reporting by Kevin Buckland; Editing by Lincoln Feast.)
Asian stocks rally, battered bond market tries for stability
By Wayne Cole
SYDNEY (Reuters) – Asian shares rallied on Monday as some semblance of calm returned to bond markets after last week’s wild ride, while progress in the huge U.S. stimulus package underpinned optimism about the global economy and sent oil prices higher.
China’s official manufacturing PMI out over the weekend missed forecasts, but Japanese figures showed the fastest growth in two years. Investors are also counting on upbeat news from a raft of U.S. data due this week including the February payrolls report.
Helping sentiment was news deliveries of the newly approved Johnson & Johnson COVID-19 vaccine should start on Tuesday.
MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 1%, after shedding 3.7% last Friday.
Japan’s Nikkei rallied 2.1%, while Chinese blue chips added 0.8%.
NASDAQ futures bounced 1.2% and S&P 500 futures 0.8%. EUROSTOXX 50 futures and FTSE futures both rose 1.0%.
Yields on U.S. 10-year notes held at 1.40%, from last week’s peak of 1.61%. They climbed 11 basis points last week to be up 50 basis points on the year so far.
“The bond moves on Friday still feel like a pause for air, rather than the catalyst for a move towards calmer waters,” said Rodrigo Catril, a senior strategist at NAB.
“Market participants remain nervous over the prospect of higher inflation as economies look to reopen aided by vaccine roll outs, high levels of savings along with solid fiscal and monetary support.”
Analysts at BofA noted the bond bear market was now one of the most severe on record with the annualised price return from 10-year U.S. govt bonds down 29% since last August, with Australia off 19%, the UK 16% and Canada 10%.
The rout owed much to expectations of faster U.S. growth as the House passed President Joe Biden’s $1.9 trillion coronavirus relief package, sending it to Senate.
BofA’s U.S. Economist Michelle Meyer lifted her forecast for economic growth to 6.5% for this year and 5% next, due to the likelihood of the larger stimulus package, better news on the virus front and encouraging data.
U.S. virus cases were also down 72% since a Jan. 12 peak and hospitalisations are following closely behind, BofA added.
Higher U.S. yields combined with the general shift to safety helped the dollar index rebound to 90.787 from a seven-week low of 89.677.
On Monday, the euro was steady at $1.2083, compared to last week’s peak of $1.2242, while the dollar held near a six-month top on the yen at 106.60.
“Riskier” currencies and those exposed to commodities bounced a little after taking a beating late last week, with the Australian and Canadian dollars up and emerging market currencies from Brazil to Turkey looking steadier.
Non-yielding gold was still nursing losses after hitting an eight-month low on Friday en route to its worst month since November 2016. It was last at $1,750 an ounce, just above a trough around $1,716.
Oil prices extended their gains ahead of an OPEC meeting this week where supply could be increased. Brent gained 4.8% last week and WTI 3.8%, while both were about 20% higher over February as a whole. [O/R]
Brent was last up $1.11 at $65.53, while U.S. crude rose $1.04 to $62.54 per barrel.
(Editing by Shri Navaratnam and Lincoln Feast.)
Buffett upbeat on U.S. and Berkshire, buys back stock even as pandemic hits results
By Jonathan Stempel
(Reuters) – Warren Buffett’s enthusiasm for the future of America and his company Berkshire Hathaway Inc has not been dimmed by the coronavirus pandemic.
Buffett used his annual letter to investors to assure he and his successors would be careful stewards of their money at Berkshire, where “the passage of time” and “an inner calm” would help serve them well.
Despite the disappearance last year of more than 31,000 jobs from Berkshire’s workforce, Buffett retained his trademark optimism, buying back a record $24.7 billion of its stock in 2020 in a sign he considers it undervalued.
He also hailed the economy’s capacity to endure “severe interruptions” and enjoy “breathtaking” progress.
“Our unwavering conclusion: Never bet against America,” he said. ((https://www.berkshirehathaway.com/letters/2020ltr.pdf))
Tom Russo, a partner at Gardner, Russo & Gardner in Lancaster, Pennsylvania and longtime Berkshire investor, said: “He’s a deep believer in his company and the country.”
The letter breaks an uncharacteristic silence for the 90-year-old Buffett, who has been almost completely invisible to the public since Berkshire’s annual meeting last May.
But while touching on familiar themes, including Wall Street bankers’ avarice for dealmaking fees that benefit them more than companies they represent, Buffett did not dwell on the pandemic, a prime factor behind Berkshire’s job losses.
He also did not address recent social upheavals or the divisive political environment that some companies now address more directly.
“The letter highlighted the innovation and values that have become the backbone of America, and that’s perfectly acceptable,” said Cathy Seifert, an analyst at CFRA Research with a “hold” rating on Berkshire.
“Given the reverence that investors have for him, the letter was striking for what it omitted,” she added. “A new generation of investors demands a degree of social awareness, and that companies like Berkshire set out their beliefs, standards and goals.”
Buffett also signaled a long-term commitment to Apple Inc, where Berkshire ended 2020 with $120.4 billion of stock despite recently selling several billion dollars more.
He called Apple and the BNSF railroad Berkshire’s most valuable assets – “it’s pretty much a toss-up” – other than its insurance operations, and ahead of Berkshire Hathaway Energy. “The family jewels,” he called those four investments.
PROFIT RISES EVEN AS JOBS ARE LOST
Berkshire on Saturday also reported net income of $35.84 billion in the fourth quarter, and $42.52 billion for the year, both reflecting large gains from its stocks.
Operating income, which Buffett considers a more accurate measure of performance, fell 9% for the year to $21.92 billion.
The stock buybacks have continued in 2021, with Berkshire repurchasing more than $4 billion of its own stock. It ended 2020 with $138.3 billion of cash.
However, Buffett bemoaned fixed income as an investment, saying that “bonds are not the place to be these days.” The income from a 10-year U.S. Treasury bond fell 94% from a 15.8% yield in September 1981 to 0.93% at the end of 2020. Benchmark Treasury yields have jumped since but are still low by historic measures.
“Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” the letter said.
Berkshire, based in Omaha, Nebraska, has more than 90 operating units including the BNSF railroad, Geico car insurer, Dairy Queen ice cream and See’s candies.
Its workforce declined 8% from a year earlier to about 360,000 employees. Bigger drops were reported at BNSF, which shed 5,600 jobs, and See’s, where employment fell 16%.
The pandemic hit no Berkshire business harder than Precision Castparts Corp, which shed 13,473, or 40%, of its jobs.
Berkshire bought the aircraft and industrial parts maker in 2016 for $32.1 billion, Buffett’s largest acquisition, and took a $9.8 billion writedown as the pandemic decimated travel and punished Precision’s aerospace customers.
“I paid too much for the company,” Buffett wrote. “I was simply too optimistic about PCC’s normalized profit potential.
“PCC is far from my first error of that sort,” he said. “But it’s a big one.”
Berkshire said some businesses are beginning to recover form the pandemic.
“Certainly 2021 is going to be a much stronger year, dependent upon the speed of vaccinations and the opening of the U.S. economy,” said Jim Shanahan, an analyst at Edward Jones & Co with a “buy” rating on Berkshire.
Buffett also said Berkshire’s annual meeting will be held in Los Angeles rather than Omaha, allowing 97-year-old Vice Chairman Charlie Munger, a Californian, to rejoin him and answering about 3-1/2 hours of shareholder questions.
Vice Chairmen Greg Abel, 58, and Ajit Jain, 69, who are widely considered frontrunners to succeed Buffett as chief executive, will also be available to answer questions.
Buffett said he hopes Berkshire will in 2022 resume its annual shareholder weekend in Omaha, which normally draws around 40,000 people – an “honest-to-God annual meeting, Berkshire-style,” he wrote.
(Reporting by Jonathan Stempel in New York; editing by Megan Davies, Alden Bentley, Marguerita Choy and Cynthia Osterman)
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