Years of FX Market Manipulation Push ACI to Update Code of Conduct

Following several years of rate-fixing and market-manipulating scandals involving the world’s major banks, the ACI Financial Markets Association has updated its code of conduct to make plain that banks must not abuse “last look” rights.

“Last look” refers to a feature on many Forex platforms allowing Market Makers to reject trades they don’t want to be completed. This feature has its roots in phone trading when dealers, clients and brokers needed to see if prices were still in line with the market by the end of a conversation.

Back then this permitted transactions to reflect, as close as possible, the prevailing rate. However, there is concern that this has been abused in recent years to methodically reject unfavourable orders or to float false orders with no intention of executing them in order to flush out positions of other participants—in other words, giving banks the chance to front-run client orders.

“Under no circumstances should orders with last look be placed for the purpose of price discovery and with no intention to trade…[Last look] should only be used in order to mitigate technological anomalies and latencies when showing firm prices to customers,” reads the code, due for publication on Monday after its approval at the ACI’s annual congress in Milan this past weekend.

The code continues: “Use of electronic algorithms solely to accept trades that are favourable to the bank and to reject non-favourable deals, when the criteria for assessing are equal, should be avoided.”

This amendment carries weight for two reasons: Abiding by the ACI’s code of conduct has been one of the defences banks have hid behind to show that they are working to improve practices and oversight in dealing rooms after years of scandal.

As well, this change is also recognized by the European Central Bank and a handful of other global central banks as industry guidelines. With the FX rate-fixing scandal that erupted last year alone resulting in six major banks paying over $3 billion in fines, this is the first welcome "fix" the $5 trillion-a-day industry has seen in a while.