Five banks being fined £3.6 billion in the US for manipulating forex is a stark reminder of the legal risks involved in currency trading. Here, Aziz Rahman of Rahman Ravelli examines how the brokers and the traders in forex can avoid legal problems.
Recent events have shown that forex trading involves risk; not to mention a variety of laws and regulations.
As we write this, Barclays, JP Morgan, Citigroup, RBS and UBS have been hit with fines totalling £3.6 billion in the US for manipulating forex – and criminal charges are being laid. In the UK, the Serious Fraud Office (SFO) is preparing potential criminal charges as part of its lengthy forex investigation. Many in forex are set to need expert legal representation.
It almost goes without saying that forex brokers must ensure that there are enough funds to meet their clients’ needs. They must also be honest and make a full and clear disclosure of all the possible risks and possible consequences of trading with them. Forex has become attractive to those looking to trade illegally thanks, in some part, to online trading. This has placed brokers and traders at greater risk of suffering major losses or becoming embroiled in a criminal operation. Or both. Caution is crucial.
At Rahman Ravelli, we have become familiar with situations in which forex professionals have become involved with people who have caused them legal and financial problems that could have been avoided.
It is to be expected that brokers and traders will emphasise their ability and track record. But far more important for both are the legal requirements that they have to meet. If you are working in forex, have you the necessary accreditation? Can you call on the funds – which we mentioned earlier – to cover clients’ needs? Do you have any insurance or other protection in place in case the trading does not work out as planned? Are you careful not to trade via the interbank market, which carries the risk of dealing with unaccredited people? If the answers are yes to the above then you are at least on the way to being legally compliant as you are fulfilling the basic responsibilities of your post.
But what else can you do to make sure you can prove that your activities are beyond reproach if and when the authorities start asking questions?
Basic due diligence on the people you are doing business with is essential. But it is also necessary to scrutinise your way of working in precise detail. If you are not sure how to go about this – or what you should be checking – seek expert advice. This has to be done if legal problems are to be avoided.
The regulatory investigations that have started into forex have looked into abuse of the benchmark rates. In the UK, the Financial Conduct Authority (FCA) discovered that traders at various banks shared customer order details, changed trading positions to the shared interests of banks and attempted to trade in a way that manipulated some benchmark rates. Investigators will be looking for criminal and unprofessional practice. It is important that anyone under investigation can prove they did neither. So what would constitute such behaviour?
The Non-Investment Products Code (NIPs) was drafted to cover the forex market and ensure standards of professionalism and legality. Drawn up in 2011 by the Bank of England, the Financial Services Authority (FSA) and other interested parties, it is arguably the most concise summary of the obligations faced by those working in forex markets.
The Code calls on firms and their employees to “act in accordance with the spirit as well as the letter of the Code’’ when undertaking forex transactions. It also places an obligation on those involved in forex deals to have the authority and necessary training to do so and be fully up to date on all professional guidance. Such requirements are the forex industry’s call to compliance.
If you are failing to meet any of these requirements it could be extremely difficult to be able to argue against any criminal allegations made against you. Similarly, NIPs calls on those working in forex to do so free from any potential or actual conflict of interest – which is an issue that may come to the fore if rates have been abused, as is alleged. NIPs also expects that “when entering into or arranging individual deals, dealers and brokers should seek to ensure that they do not provide misleading information or misrepresent the nature of any transaction in any way.’’ The Code requires management to have in place – and review regularly – appropriate control procedures that their staff should follow and requires “use of appropriate security measures’’ for electronic trading.
As an overview of what those involved in forex should (and shouldn’t) be doing, the Code is comprehensive. If you are looking to ensure compliance, its measures need to be followed. If you are not following them then swift action needs to be taken – or legal advice sought – so that procedures can be put in place to design out the potential for trouble. And if this has not been done before the authorities start looking into your business practices, you need to seek expert legal advice from specialists who can use all evidence available to mount a robust defence case.
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