How the Essex Express derailed
and showed us the importance of continuous due diligence practices
Last week Bloomberg reported on the settlement fine for several global banks on market abuse related to FX transactions, dated back to 2013 and earlier. The so-called Essex Express. In a similar situation Threadneedle was fined GBP 6 mln for a collusion incident with transactions in Argentian Warrants in the period 2010-2012.
Collusion can be defined as an act of people and companies who conspire to work together to gain an unfair market advantage. Collusion is non-competitive and secretive.
On the back of these and other events, the European Commission issued the Market Abuse regulation in 2015/16. This regulation aims to safeguard the integrity of the financial markets and improve investors’ protection on and confidence in the market.
A closer look at this Essex Express shows clear form of inside information, as defined in the Market Abuse Regulation but also an act of collusion. Bankers at rival banks talked all day in chat rooms about commercially sensitive information and engaged in “standing down”.
“ The men talked about how much their clients wanted to exchange for which currency, the bid-ask spreads, their open-risk positions or how much they still needed to buy or sell. They also sometimes agreed to hold back from trading to help each other.”
Although these chat rooms have very entertaining names like Grumpy Old Men and Three way Banana Splitand also contain lots of banter between the rival traders, for the European Commission just taking part in these chat rooms shows a tacit agreement to collude.
Lethal injection to trust
Collusion, internally or on both sides of the deal, is a lethal injection to trust in the market place, where regulation is only part of the antidote. Knowing what is going on and get acquainted with the (lack of) measures implemented by market participants to avoid and detect collusion (and other forms of market abuse) between market participants is the second part of the antidote. Waiting for a whistleblower making a good deal for itself to rat out others, can hardly be considered a proper strategy for asset owners.
Unarguably asset owners and other market participants should feel protected by proper regulation. This is, however, one part of safeguarding confidence and trust in the market. Trust between asset owners, asset and money managers, brokers and dealers (the market) can only partly be established by regulation. Long-term partnerships based on mutual respect is pre-requisite for sustainable trust in the market place.
A better understanding of investment operations, by proper due diligence, enables asset owners to exercise countervailing power and bridging distance in terms of information, governance and expertise and is a first step in long-term partnerships and sustainable trust.