Scrumdown and the Advantages of Pushing Together!

[fa icon="calendar"] 18-Oct-2019 15:01:09 / by David Woolcock


With the Rugby World Cup in full swing and moving to the decisive knock out stages, we have been treated to a feast of the oval ball game. Some great matches and a fairy tale unfolding as the ‘Brave Blossoms’ cause more than one upset. The host nation has won hearts and minds during their continuing progress. Elsewhere in the competition, and as usual, the scrum set pieces have garnered a certain amount of controversy!

Going into the World Cup the rules of the scrummage were subject to an emergency change and the rules governing this set piece are akin to financial regulation! The change was to reduce “axial loading” and in some ways were a response to unintended consequences of rule changes that went before. Similarly, in the world of financial regulation, rumours swirl about MiFID III becoming a reality. Loopholes and unintended consequences are making the prospect of further European regulation a question of when rather than if.

In the foreign exchange market, much attention has been focussing on Market Abuse. This is originating from the fact that the spot FX market is unregulated (though a lot of participants are regulated) and as such is not captured by the Market Abuse Regulation (MAR) in Europe. This has led to a consultation from ESMA that contains this worrying clause – “before MAR could be applied, the spot FX market might need to develop features required by MiFID II to trading venues and market participants regarding systems and controls, transparency, conduct requirements, and reporting obligations.”

In the UK the Fair and Effective Market Review (FEMR) recommended that the UK make spot FX market manipulation a specific criminal offence. In the ESMA consultation it “notes that the publication of the FX Global Code of Conduct (FXGC) developed by central banks and market participants from sixteen jurisdictions around the globe has already achieved progress in promoting higher standards in the wholesale FX market. The Code sought to specifically address previous conduct issues in the spot FX market around conflicts of interest, handling of confidential information and transparency (i.e. disclosure) as regards how market participants executed and managed FX transactions.”

Mark Carney when recently testifying before a UK parliamentary committee also raised spot FX market manipulation noting that FEMR had led to the FXGC and that it had been tied to the Senior Managers & Certification Regime (SMCR) thus requiring market participants to train, oversee, and discipline personnel in FX markets with real consequences in terms of livelihood for both the personnel involved and their senior managers for breaches to the Code. He made the point that the FXGC covers sharing customer information and spoofing but that for extreme criminal abuse it was not covered in the same way as regulated markets. His recommendation was that parliament should legislate to make market manipulation of the FX market an actual criminal offence.

This all follows on from the FCA recognising, in June this year, the FXGC and embedding it in the SMCR. This means that market participants need to meet the requirements for market conduct, for both regulated and unregulated activities.  Behaviour that is in line with an FCA recognised code will tend to indicate a person subject to the SM&CR is meeting their obligation to observe ‘proper standards of market conduct’. In a way it extends principles in regulations, like Best Execution for example, to spot FX.

Back to rugby, the changes to the scrum rules in July seem to have bedded down nicely and teams have adjusted to the new order. I am not so sure that the type of financial regulatory change and tweaking headed our way will be as easy. If spot FX was made a financial instrument in MiFID II with the attendant obligations under MiFIR this would be a huge undertaking for market participants and regulators alike. With IBOR transition already a huge headache and these potential regulatory changes looming on the horizon those who have not got a very robust technology solution are going to be looking for a more permanent solution rather than the workarounds that many have in place.

The scrum in rugby is one of the most complex areas and a vital cog in both offence and defence. Having the weaker scrum puts the entire team on the back foot and demoralises the forwards as well as the backline. So, as we go through the upcoming regulatory changes, it will be seen that combined and coordinated front office systems are equally vital for both offence (client success) and defence (compliance) as well as influencing refereeing (reporting and risk). Having all these elements binding and pushing straight together will be a winning formula.

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Topics: treasury trading

David Woolcock

Written by David Woolcock

David Woolcock is an independent consultant and Director, Business Consulting at Eurobase. In addition, David is Chair of the Committee for Professionalism at ACI – The Financial Markets Association as well as Vice-Chairing the ACI FX Committee. He is also a member of the Market Practitioners Group for the Bank of International Settlement's FXWG that wrote the FX Global Code.