Barely a week after the Bank for International Settlements (BIS) released its Global Code of Conduct for the foreign exchange market, reports surfaced that JPMorgan has released new guidelines to clarify why it rejects some currency trades on a last-look basis, cited by coverage from the Financial Times and Bloomberg.
The guidelines from JPMorgan included references to how it could cancel a trade even after a client hit the price from a trading screen or platform if adverse market moves occurred or problems with credit checks arose, as noted in a Bloomberg article.
Streamed prices may be revised or withdrawn without notice, may vary by client, and may differ from the spot FX prices quoted for identical or similar transactions.
Disclosures after Global Code
The article quoted the bank: “Streamed prices may be revised or withdrawn without notice, may vary by client, and may differ from the spot FX prices quoted for identical or similar transactions.”
These type of risk warnings and disclosures are very common in the often-detailed customer agreements that consist of mostly legal jargon, while the actual understanding of how firms handle execution may be less transparent to clients.
While it’s prudent for JPMorgan to highlight these disclosures prominently, many forex brokers may arbitrarily employ such power – depending on their customer agreements – to keep an upper hand on clients in situations where there is a trade dispute and requiring in some cases alternative dispute resolution (ADR) or other 3rd party remedial or legal solutions aimed to settle complaints. Many agreements mandate arbitration or local courts for legal disputes to be settled, yet both local courts or arbitrators may be ill-equipped to handle complex financial-related product complaints.
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Last-look in focus
Last-look itself has been employed since the FX markets first evolved, yet that practice has been under scrutiny for some time – in wake of asymmetrical slippage or dealing that is construed as unfair where the broker only executes when the rates are favourable for itself yet may reject a trade that may cause it a loss even if it would be favourable for customers. This decision can be made at the fleeting moments before a trade is executed, hence the term last-look.
This challenge appears natural because of the over-the-counter (OTC) nature of the FX markets where prices can vary across dealers versus a centralized exchange where there may be a national best-bid offer (NBBO) where the price is the best available.
At a centralized exchange where market-makers and brokers trade, there may be specialists that are required to execute even when the market is adverse for them and even when it is beneficial for traders (at the dealers expense).
Greater transparency looming
While the new Global Code of Conduct is voluntary, it appears to be helping to set the stage for future progress as major banks may follow after JPMorgan to bring greater disclosure on their execution policies and in greater details regarding matters such as last-look.
Some dealers have already taken steps to add a delay or speedbump or abolish the last-look practice and which may come at a cost to market participants or have some other unintended consequence.
Furthermore, these changes with regard to bringing greater disclosure and transparency to execution practices should help trickle down to retail brokerages as well, even though many of them are already highly regulated and have high standards – there still remains a multitude of jurisdictions and companies that operate in a less-transparent or unregulated environment making it harder to ascertain and troubleshoot customer complaints regarding trade executions.