September 11


FCM360 Forex Summit Newsletter Fall 2015


The fall issue of FCM360 Forex Summit profiles Jack Drohan III, whose New York law firm Drohan Lee has established a premiere position in the financial community. We’ve also taken a look at why FX platform providers are striving to penetrate the corporate market in an article by industry authority and writer Galen Stops of Profit & Loss Magazine. Our News, Appointments and Events section includes details on the upcoming SIBOS show in Singapore and touches upon China’s increasing level cyber threats. ~ The Editors.

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Jack Drohan brings a decade of trading experience to his New York law firm Drohan Lee

Is Rainman Hayes’s LIBOR abuse conviction part of a bigger scandal?

John P. Drohan III, Drohan Leee (2)When John P. Drohan III started focusing his law practice on commodities and investment advisory law and regulation two decades ago, he did so following 11 years of institutional trader experience as a senior capital markets dealer for such banks as First Chicago International and Deutsche Bank.

Jack’s practice includes derivatives transactions, domestic and offshore hedge fund formation and investment due diligence. In 1995, he became a partner in Drohan & Drohan LLP until that firm merged into Drohan Lee LLP in 2007.

Before launching his legal practice, Drohan’s trading experience included all major spot and forward currencies, money market instruments, options and derivatives. His combined hands-on financial and legal experience makes him a sought after speaker, addressing the hedge fund industry and academic conferences.

Drohan graduated from Washington University at St. Louis in 1982. He earned a Master of Business Administration in Finance and Investments from Baruch College in 1986, and his Juris Doctorate from Brooklyn Law School in 1990, where he was on the Brooklyn Law Review.

He is also the newly appointed Americas regional President of ACI Financial Markets Association, the 15,000 – member global best practices group for the wholesale capital markets since 1955. He has published articles on financial economics, federal civil procedure and commodities regulation

Given his unique vantage point—trader turned lawyer— we wanted to know how he viewed the latest in-bank trading scandal to hit the news—the conviction of Tom Hayes. Hayes, after making a career of fixing London interbank lending rates or, LIBOR, and other abuses, was sentenced in August to 14 years in prison by a London court.

The criminal conviction against Hayes is in stark contrast to the six major banks that were fined civily  for forex abuses.

Tom Hayes looks like the first criminal conviction for fixing the LIBOR. Is Hayes guilty of anything more than implementing behavior bank managers tacitly approve?

Drohan: I think Judge Jeremy Cooke’s decision sent a calculated signal that the integrity of markets begins with individual accountability. I’ve heard comment that Mr. Hayes seems to have genuinely believed in his own innocence—in other words, that his market conduct and trading techniques were appropriate. If true, this is more disturbing than the conduct itself! It highlights the need, not only for a standard code of conduct for capital markets dealers, but supports the growing mandate for training and certification.

The conduct presented by the UK’s Serious Fraud Office showed Hayes to clearly be violating a number of model codes, in addition to legal and regulatory requirements. I’ve never heard of an NFA Series 3 or 34 holder try to defend benchmark manipulation, rate fixing or self dealing on the basis of their belief that this conduct was ‘appropriate’ under the standards by which they certified.

Are bank managers partially to blame?

Drohan: As to bank management complicity, it goes beyond supervision. We currently are looking at a widespread compensation system that invites malfeasance by rewarding month-to-month revenue, instead of best execution. Performance mandate and review committees, as well as HR executives must get on board to reduce this kind of bad behavior.

2008 brought with it a big push for stricter regulation. It’s been seven years and we have an election coming up in 2016. What do you see moving forward?

Drohan: Regardless of political analysis, even key regulators seem to be recognizing that the rules have fallen short of the market. Instead of creating a cohesive regulatory framework, regulation has led to fragmentation both in the US and on a cross-border basis.

All sectors are simply looking for regulatory clarity. Most of my clients—larger commodity pools and liquidity providers—are happy to comply with rules that are clear. The main complaint I hear is that implementation of Dodd Frank has been extremely slow.

What about the impact of over zealous regulation?

Drohan: Dodd Frank has had a negative competitive impact on US versus non-US institutions. The assumption was that people would move off shore for a few years and, over time, uniform global standards would be promulgated to eliminate forum shopping for the sovereignty with the most advantageous regulatory climate. While overconcentration would not be good either, this kind of global fragmentation presented us with systemic risks.

Did Congress and the regulators—including those in the UK—overreact to the archetypal rogue trader – the bad actor?

Drohan: “I think the Hayes case is a useful example of the contrast between current and former enforcement approaches, as well as US versus UK distinctions.  We’ve seen rogue trader cases going back to the 1980s and at that time, bank management would claim they are being diligent and overseeing the trading process. When a trader goes off the rails and engages in a loss-creating conduct, US. banks would often feign incredulity and fire the trader. When I was a bank dealer over twenty years ago, there was so much direct supervision that I found it disingenuous for management to claim it did not know or could not know anything about a rogue trader. Even today, profitable traders are given a lot of leeway and bank managers are compensated based on aggregate income from trading areas they supervise.

But Hayes was a convicted of criminal acts, this was no slap on the wrist civil sanction, agreed?

Drohan: Unlike in jurisdictions like Singapore, criminal convictions for bank dealers are a relatively new development in the US and UK, as is Hayes’ “pass the buck up” defense strategy. There is a lot of chatter about scapegoating, and naturally the banks are anxious to settle, based not only on the extensive electronic communication evidence supporting these cases, but in the interest of avoiding a more extensive institutional and systemic impact of potential penalties.

In the end however, supervisory failure is a recognized independent violation under U.S. commodities laws, and we can count on management’s actual or imputed knowledge to be the emerging standard.

If I am a bank manager and I see something should I say something?

Another important distinction is the cultural and legal treatment afforded whistleblowers in the US versus the UK.  The S.E.C. has afforded increasing protections and incentives to financial whistleblowers in the US. On the other hand, British law caps awards in unfair dismissal cases, and “shouting out,” as it is termed in the U.K., while codified, is often penalized when done purely for a financial incentive, and subject to public ridicule.”

Final thoughts?

High-speed, high frequency trading places a bigger burden on enforcement, but remember, if something is illegal, it does not become legal because you can do it really fast.

Why FX platform providers are targeting corporate clients

by Galen Stops of Profit & Loss magazine

Galen Stops
Galen Stops

Although the corporate segment has always been an attractive one to multi-bank FX platform providers, there appears to be a renewed focus on targeting this business.

In the past month EBS BrokerTec has integrated its money market fund, MyTreasury, into its product portfolio, Thomson Reuters integrated FXall trading into Eikon, Bloomberg has been promoting its corporate offering, 360T has been the subject of a EUR725 million acquisition and rumors in the market suggest that Currenex is planning to turn its focus back to the corporate side of its business.

There are a number of reasons why the corporate market is looking so attractive to multi-bank FX platform providers.

Institutional players have numerous FX platforms available to them. But on the corporate side the vast majority of trading activity occurs on 360T, FXall and Bloomberg, with Currenex having a healthy, but proportionally smaller, corporate client list.

The clear disparity in the competitive landscape between the corporate and the rest of the institutional FX client segments means that firms see an opportunity for further penetration of this market.

Secondly, a lower percentage of corporates are trading their FX electronically in comparison to the interbank market, meaning that from a multi-bank platform perspective there is more headroom for growth in this client segment.

Thirdly, these platform providers want to attract more corporate business because this flow is traditionally more profitable for the banks, as corporates are more concerned about workflow efficiencies, auditability, removing the potential for errors and spreading their business between all of their relationship banks than they are about price when executing FX trades.

If the banks are making more money off the corporate flows then arguably they will be less concerned about the fees they pay for the platforms and therefore it’s good business for both.

But in terms of competition, the corporates market is a difficult one for multi-bank FX platforms to break into. The emphasis on workflow in treasury departments means that the corporate systems are heavily integrated with their existing platform providers, making the platforms themselves very sticky.

This stickiness is compounded by the fact that the incumbents in the market have evolved their platforms to satisfy the unique requirements of their corporate clients in different geographies—each of which can have different rules and challenges.

So rather than winning business from competitors, the platforms will primarily be targeting corporates who do not currently hedge their FX exposure electronically. The corporate market is vast and the increasingly global nature of business means that the FX exposures of this client segment are constantly growing, which in turn means growing opportunities for the platform providers.

Therefore competition in this space will continue to intensify, but rather than pricing, the key battleground for the FX platform providers targeting corporate clients will be about which banks they are able to sign up as liquidity providers, what workflow improvements and efficiencies they can offer and what security features are built in to prevent mistakes.

To read this article in full, please click here.

News, Appointments & Events

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For a summary of banking industry trends and issues covered at SIBOS Boston that focused on ongoing regulatory overload for the industry (a dominant theme over the last five SIBOS conferences), keeping ahead of non-bank competition and the need to digitize interactions with clients or face extinction click to read the Aité report: Sibos 2014 – Deliberations on the Digital Age.

Can we win a (cyber) war with China? After David Gewitz of ZDNet ran a cyber attack simulation he determined that “our financial system is clearly at risk, and so are elements of our infrastructure. Particularly vulnerable are all the infrastructure systems based on older technology that either cost too much — or are too much work — to upgrade.” Think the power grid. Gewitz’s article “Could cyberwar knock us back to  the stone age,” takes a worst-case look at the consequences of cyberwar “… let’s start by assuming the financial system would come to a halt. Stock exchange transactions would stop, and all electronic fund and electronic banking transactions would cease. At that point, checks and credit cards would no longer have value, businesses would no longer be able to operate, and even cash would likely lose its transaction value.”  Read More.

This is Money…Fines for fx and Libor price manipulation just keep piling up with Britain’s four biggest banks racking up £50 billion in fines. The extraordinary bill for wrongdoing has swept up Royal Bank of Scotland, Lloyds and Barclays, which have announced they have set aside more money to pay for past sins. HSBC yesterday became the latest lender to make a huge provision. Read More.

EMV is quietly making its way to the Americas. If you haven’t noticed your new credit cards probably include an unassuming rectangle smart chip in the upper left hand corner that is upgrading your card to global security standards known as EMV.

These smart chips, writes Robert Harrow for Huntington Post, are your new line of defense against credit card fraud. Unlike the magnetic stripe that stores lots of easy-to-copy information, the smart chips scramble the data with every purchase. They also thwart “skimmers” who mine information at ATMs and other public places. Read More.

FX News That Matters

CNBC…China has tightened its capital controls, in a sharp reversal of its market liberalizing rhetoric, as it struggles to contain the fallout from last month’s devaluation of the Renminbi. Read more.

Morningstar…A class action lawsuit seeking $1 billion in damages on behalf of Canadian investors was launched today in the Ontario Superior Court of Justice. At the same time, a motion for authorization of a class action was filed in the Quebec Superior Court. Details.

The class actions allege that the defendants, the world’s dominant foreign exchange dealers (including the Royal Bank of Canada), conspired to manipulate the prices of currency trades for at least a ten-year period, resulting in billions of dollars in illegal gains. Details.


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