Are global forex regulators finally ready to tackle global fraud together?

Published: 20 May 2015
By: Tom Cleveland

The Internet in two short decades has revolutionized how we live, work, and communicate with one another on a daily basis, but, unfortunately, it has also given the criminal element in our society an invaluable tool with which to deceive and defraud. Our parents always told us to avoid a stranger if and when he or she approached us, but, in that case, we could use our two eyes to warn us ahead of time. In many respects, trust has taken a backseat on the Internet express. Visual clues are more difficult to come by, and we tend to give our trust too easily, a trait that fraudsters use to their advantage.

Financial Internet fraud is growing enormously, and part of the reason is that crooks have used foreign jurisdictions to perpetrate their various schemes on the web. The crook may look like he operates nearby, but in many cases, his operating center is in a land far, far, away, where your domestic law enforcement officials have little or no influence when something bad goes down. Forex regulators have done a good job in cleaning up local scams, but, when the crooked party resides across a border, you may as well kiss your money goodbye. This scenario is no joke. One of the biggest complaints today is of a foreign forex broker that refuses to honor a withdrawal request.

If the legal system does not provide a way to easily protect your rights in a foreign jurisdiction, then what hope is there that the current situation can be improved? The only corrective measure that has worked to date is to increase consumer awareness of the problem. Regulatory bodies have been proactive in their respective countries to educate the public on the risks of forex trading, especially when using a broker outside of your national borders, and producing “blacklists” of websites to be avoided at all costs. But, in order for these tactics to work, consumers must hear the message, take note, and then embody caution when searching for a currency broker that will fulfill their needs and give them peace of mind at night.

Are there any other actions that could yield more protection?

International law has always been a complex arena for commercial transactions. Vast resources are devoted at a corporate level to produce ironclad contracts with Letters of Credit that facilitate the flow of huge amounts of capital, as long as specific milestones in each contract are achieved to both parties’ satisfaction. Modifying current legal frameworks to simplify this process has been attempted, but without much success. Changing existing laws is not the answer, especially when forex is on the leading edge.

Coordinating forex business standards on a global basis might, however, hold some promise and allow regulatory bodies to work more closely together across national boundaries to stop the crooks before they get too far down the line. The best institution to lead this fight happens to be the Bank for International Settlements (BIS), the central banking agency that coordinates all activities between central banks across the globe. Regulatory authority typically falls to some degree within the purview of a nation’s central bank, such that this approach would be the correct step to make.

The BIS is already moving in this direction, and, according to Reuters, “The Bank for International Settlements has set up a working group aimed at creating a single global code of conduct for the foreign exchange market, the central banks' central bank said on Monday. The group will be headed by Reserve Bank of Australia Assistant Governor Guy Debelle, the co-author of recommendations drawn up last year for reforming "fixing" benchmarks after two years of scandal over their alleged manipulation. A number of senior central bank officials were for the first time optimistic about unifying the disparate codes of conduct used in different jurisdictions into one central document.”

James Kemp, Managing Director for Global FX at the Global Financial Markets Association (GFMA), has long waited for such a move from the BIS and believes that all participants will welcome the attempt to coordinate the alignment of regional codes. He also said in a statement, “This is an opportunity for market participants to work with regulators and supervisors to demonstrate that they can put the right controls and guidance in place. As demonstrated by various initiatives already under way, the GFMA’s FX Division is highly supportive of this initiative.”

What is the Bank for International Settlements and what is their mission?

The BIS was established in Basel, Switzerland in1930 and retains the title of being the world's oldest international financial organization. Its membership is comprised of sixty central banks that represent a broad array of countries from around the world that together constitute roughly 95% of world GDP. The organization’s stated mission is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

Although it is technically a bank, the BIS does not accept deposits from individuals or business entities, but it does fulfill its mission by the following activities, as detailed on their website:

  • Fostering discussion and facilitating collaboration among central banks;
  • Supporting dialogue with other authorities that are responsible for promoting financial stability;
  • Carrying out research and policy analysis on issues of relevance for monetary and financial stability;
  • Acting as a prime counterparty for central banks in their financial transactions; and
  • Serving as an agent or trustee in connection with international financial operations.

The BIS is best known for its global coordinating activities, research, and statistics gathering, all designed to promote the public good by fostering monetary and financial stability, the precursors for economic growth and prosperity. From a forex perspective, global statistics are gathered and distributed by this group on a triennial basis, the last one ending in April of 2013. At that point in time, daily turnover in foreign exchange instruments exceeded $5.3 trillion, a 33% increase over the results reported in 2010. The pairings for the USD lead the way with 43.5% of all transactions. EUR related pairings came in at 16.7%, followed by the JPY (11.5%), the GBP (5.9%), the AUD (4.3%), and all others (18.1%).

The U.S. Dollar remains unchallenged as the dominant currency vehicle for global commerce. The “USD/EUR” also remains the number one traded currency pair, but the “USD/JPY” increased its share dramatically during the previous three-year period to fall just 24% below the “USD/EUR” in daily volume. As for geographical distribution, the order of the five largest financial centers did not change. The top five remain the United Kingdom (41%), the United States (19%), Singapore (5.7%), Japan (5.6%) and Hong Kong SAR (4.1%). The share of these five centers climbed to 75% from 71% in 2010.

What prompted the need for the new standards coordination initiative?

The forex industry has had to endure more than its share of tests over the past few years from the crisis in Cyprus in 2013 to the crushing losses that resulted when Swiss banking authorities dropped the peg on the Swiss Franc, not to mention the prevalence of various Ponzi schemes, “clone” brokers that steal deposits, and cyber crime in general. Regulators, however, regard much of this as nothing more than business as usual, but when major global bankers are caught red handed manipulating Libor and forex fixing rates, then a fresh offensive was needed to restore public confidence.

At $5.2 trillion a day in turnover, the foreign exchange market is the “Mother” of all markets. No other market even comes close in size, yet it is still for the most part an unregulated over-the-counter market. The Dodd-Frank Act, along with many similar responses in other markets, did much to reform the forex industry, but these efforts obviously fell short when the major participating banks in the system were assessed fines in excess of $4.3 billion for their highly questionable and unethical activities. There have been various working groups that have crafted a new set of standards that the BIS will undoubtedly endorse and support, actions that all parties see as necessary if there really is to be global coordination and acceptance of these new rules of conduct.

Concluding Remarks

Regulators prefer to be busy putting criminals in jail, ensuring that prudent business practices are being followed, and educating consumers on the risks involved in their particular sector of the market. The forex industry, however, has received far too many debilitating articles in the press of late, almost characterizing the exchange of currencies as being rigged from the top down. The only answer can be reform when the major banks in the Interbank system are found to be manipulating results to pocket millions in illegal profits. Domestic regulation cannot oversee global banking activities without a high measure of international coordination and support.

Hopefully, this new initiative will send a shockwave through the banking industry. $4.3 billion in fines will also help to restore transparency and trust, but we suspect that each bank will negotiate a more favorable settlement before this sad state of affairs is over. The BIS is expected to use, as its foundation, the report from Britain's Fair and Effective Markets Review of conduct in currency and other markets, which is due out in June. BIS working groups will augment the work with other global measures, and then the process of adoption and implementation will begin. It will take time, but our forex industry, including banks, brokers, and retail traders, will be better for it.

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