Trading venues could help enforce the forex code
ECNs have the power to boost last look disclosures, but aren’t keen to be the code police
As spot foreign exchange trading becomes more electronic, trading platforms are attracting more scrutiny.
So-called electronic communications networks (ECNs) set the rules for the liquidity providers (LPs) that make prices on their platforms. As of August 6, some 18 trading venues had signed the forex global code of conduct, which sought to strengthen dealing standards after a series of fixing scandals.
Principle 17 of the code encourages LPs to disclose their last look policies, which govern the period of time after an order is received but before execution, during which an LP conducts credit and price checks, sometimes with an add-on period for further monitoring.
Last look is a matter of some controversy, and Risk.net’s analysis of the top 50 LPs in forex shows a spread of practices. Nearly a quarter of firms don’t disclose anything, so participants on anonymous ECNs could be sending orders to counterparties with questionable or opaque last look policies.
Read more on how the top 50 dealers tackle last look and where non-banks stand on last look.
In theory, ECNs could be an ideal partner for the Global Foreign Exchange Committee, a group of central banks and market participants that wrote the code, to ensure these standards are being met across the LP community.
ECNs don’t see it that way, however. Risk.net understands that while some platforms – including EBS Market and Refinitiv Matching – do not allow last look checks, many others do permit it, subject to a few conditions.
One ECN tells Risk.net it enforces a maximum hold time of 100 milliseconds for last look and a minimum order acceptance rate of 75%. Nine LPs were removed from the platform after these standards were put in place. But it’s the exception rather than the rule.
ECNs are in a unique market position, which if used effectively could help boost disclosure of dealing standards across the market
An alternative is to require LPs on a platform to make extensive disclosures on their last look practices, including hold times, policies for rejecting orders and use of rejected order information. But on this, ECNs are largely silent.
One ECN defends its stance to Risk.net, saying they are “not the policeman of the code”.
This approach has angered some LPs, who claim they are put into competition on the platforms against firms that might engage in predatory last look practices.
Some claim it’s a race to the bottom – setting higher minimum standards or requiring extensive disclosures for last look policies could put off too many potential LPs, reducing liquidity on the venue.
Nevertheless, ECNs are in a unique market position, which if used effectively could help boost disclosure of dealing standards across the market.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Our take
Podcast: Lorenzo Ravagli on why the skew is for the many
JP Morgan quant proposes a unified framework for trading the volatility skew premium
Quants see promise in DeBerta’s untangled reading
Improved language models are able to grasp context better
Counterparty risk model links defaults to portfolio values
Fed’s Michael Pykhtin proposes using copula models to capture effects of margin calls on default risk
Does Basel’s internal loss multiplier add up?
As US agencies mull capital reforms, one regulator questions past losses as an indicator of future op risk
Is JSCC-CFTC stalemate about to be broken?
Japan CCP gains allies in battle to clear yen swaps for US clients, but CFTC shakeup could dash hopes
What T+1 risk? Dealers shake off FX concerns
Predictions of increased settlement risk and later-in-the-day trading have yet to materialise
Go your own way: departures pose new challenges for CFTC
Loss of Democratic majority would impede chairman’s ambitions for regulatory agenda
Altice’s dropdown is a warning for European creditors
Carve-out used to shield assets from lenders may occur in a fifth of European deals